The Federal Reserve recently announced that for the first time in three years, it would increase short-term interest rates by a quarter of a percentage point. In addition, the Fed has stated that it would like to see short-term interest rates near 2% by the year’s end, which would mean a hike at each of the remaining central bank meetings this year.1
Many investors have been cheered by the Fed's aggressive move to combat inflation, but even Fed officials acknowledge that higher rates could slow economic growth this year. This cautious stance is no doubt due to the upward pressure on inflation the ongoing invasion of Ukraine has caused.
How does this impact you? The raising of interest rates makes borrowing money more expensive. Money that is more expensive is less likely to be borrowed and then spent, whether that is buying a car, a home, a piece of land to develop a new shopping center, etc... Our economy is driven by spending by the consumer, businesses and governments.
The good news is that decreased spending naturally degreases demand for products and services which tends to bring their prices back down. The flip side is decreased spending also slows growth in the economy and can have an effect on the stock market.
Does this mean the stock market is going to crash purely because of the Fed raising interest rates? Not necessarily. It may cause the market to decrease and become volatile.
In these cases, we generally advise clients to do a couple things: hold on to the money you already have invested. Now may not be a good time to "get out" of the market. No one likes to sell stuff when it is worth less than they paid for it.
The second thing to do is continue to invest with new dollars - either in your retirement plan at work or through other accounts like IRAs and Roth IRAs. This may feel like you are throwing good money after bad, but really you are buying when the market is lower than it was before. If you can buy low, it's almost always a good idea to do so.
There’s no surefire way to anticipate what the future will bring, but these recent moves by the Fed indicate that interest rates are heading higher and the stock market will continue to be a "E ticket ride" as my mom used to say (that refers to a rollercoaster ride for you younger folk).
Let us know if you have any questions or concerns about these announced interest rate hikes. We’re always here to help.
1. Axios.com, March 17, 2022
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.
The Fed Makes Its Move
March 17, 2022