The Federal Reserve has begun what it says will be a series of interest rate increases in an effort to slow the economy and temper the current surge in the inflation rate. At the start of 2022, the federal funds rate stood at near zero percent. By May, the Fed moved the federal funds rate 75 basis points (0.75%) higher.
What does this mean for your money? While Fed actions directly impact large financial institutions, they also resonate throughout the financial markets. In indirect ways, your personal finances can be affected by Fed policy.
Four ways the Fed’s rate hikes in 2022 could impact your bottom line:
1. Higher borrowing costs
While the Fed’s rate hikes don’t directly affect most types of consumer loans, the direction the Fed sets on interest rates tends to carry over throughout debt markets. This could include:
Home mortgages — Adjustable-rate mortgages will be the most directly affected, as they change in conjunction with general interest rate trends in the market. If you have a fixed rate mortgage, you won’t see any change.
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Automobile loans — While a variety of factors affect how interest rates are set on vehicle loans, you can expect these rates to increase as well.
Student loans — Federal student loan rates are set and will not be directly affected. However, borrowers working with private lenders will likely see rates move higher as they are tied to the fed funds rate.
2. Modestly higher savings rates
Investors have not earned much in terms of interest on bank savings accounts, money market accounts for certificates of deposit in recent memory. While it seems reasonable to expect that yields may improve modestly, the change may not be dramatic. Even with historically low interest rates, investors have directed significant sums to these types of vehicles. In the current market environment, some investors still have a desire for such “safe haven,” high liquidity investments regardless of the interest rate earned.
3. The bond market
Fed interest rates strategies don’t impact the bond market directly, but Fed policy is watched closely by bond investors. This year, along with raising short-term rates, the Fed has also begun reducing the role it plays as a buyer in the broader bond market. That action could lessen demand for longer-term bonds, which can drive up interest rates. Even before the Fed initiated its new policies, the bond market already anticipated the change and interest rates began moving higher on most types of bonds
4. The stock market
The stock market also tends to react to the Fed’s news, and with the central bank taking steps to slow the economy, investors anticipated the potential negative effects on publicly-traded companies. As a result of this and other factors, stocks lost value at the start of the year.
It may be a good time to talk with your financial advisor about whether any of the changes mentioned above require you to update your financial plan.
Nic Gilliam is a Financial Advisor with Cordian Wealth™ a private wealth advisory practice of Ameriprise Financial Services, LLC in Statesville. He specializes in fee-based financial planning and asset management strategies. To contact him, you may call 704-872-8181. He is located at 642 Signal Hill Drive Ext., Statesville, NC 28625.