What the Federal Reserve's Decision to Hold Rates Means for Your Money
- Davina Jackson
- Feb 4, 2024
- 10 min read
Updated: Mar 8, 2024
Welcome to The Woman CFO – a space crafted just for you, where we embark on a journey of financial empowerment.
Today, we are going to unravel the Federal Reserve’s decision to hold interest rates and talk about how it directly impacts your hard-earned cash.
It's not just economics; it's real talk about your mortgage, savings, investments, and more. Are you ready? Let's dig in.
Instant Gratification Zone: Skip to the Good Stuff
What is the Federal Reserve?
The Federal Reserve, or simply "the Fed," is responsible for making sure the U.S. economy runs smoothly. It keeps an eye on things like interest rates and inflation, making sure the economy doesn't get too hot or too cold.
When rates are low, borrowing becomes cheaper, spurring spending and investment. On the flip side, raising rates helps cool off an overheated economy, curbing inflation.
So, when the Fed makes decisions, like holding or changing interest rates, it ripples through our wallets, impacting everything from loans to savings accounts and everyday spending.
Without making your eyes glaze over, here’s a short list of economic indicators and factors the Fed uses to make informed decisions about whether to raise, lower, or maintain interest rates:
Inflation
Unemployment
Gross Domestic Product (GDP)
Consumer Spending
Business Investment
Global Economic Conditions
Financial Markets
Wage Growth
By analyzing these factors (and more), the Federal Reserve aims to strike a balance between its dual mandate of price stability and maximum employment, fostering sustainable economic growth.
However, it’s their decisions on interest rates that play a crucial role in steering the overall direction of the U.S. economy.
Decoding the Federal Reserve Decision
Explanation of Wednesday’s Decision
Over the past year and half, the Fed raised overnight federal funds rate interest rates (aka “rates”) 11 times from near zero to the current range of 5.25% to 5.5% in efforts to fight persistent inflation related to a multitude of factors that rocked the economy such as lasting economic effects of the Covid-19 pandemic, supply and demand chain bottlenecks, rapidly increasing home prices and rentals, gas prices, etc.
They began holding rates in September 2023, deciding to review inflation data as the rate hikes work through our many systems. Leaving many Americans wondering if this is the end of rate hikes and, if so, when will they lower them?
This January session was no different and the Fed opted to keep interest rates steady. Citing the need for continuing evidence that inflation has been stabilized on a sustained basis before it will be appropriate to begin the easing cycle (aka “rate cuts”). They have not defined what “sustained basis” means so we’ll have to assume it means more than a few consecutive months without inflation flaring up again.
Now that we know what the Fed does, how their decisions affect us, and understand why they decided to hold rates, we can talk about how it affects almost every area of your financial life.
Let’s drill into the details.
How The Fed’s Decision Affects Your Money
1. Impact on Borrowing
Low-Interest Rates – The Borrower's Dance Floor
When the Fed decides to keep interest rates low, borrowing becomes a bit like a sale at your favorite store – everything's a bit more affordable.
Car loans, mortgages, or even using your credit card are on a bit of a discount and interest doesn’t sting as much.
It’s a fantastic time for making significant purchases and managing existing debts more efficiently.
High-Interest Rates – A Borrower's Challenge
On the flip side, when the Fed decides to raise interest rates, it's like the price tag on your favorite shoes suddenly doubling.
Borrowing becomes pricier. Car loans, mortgages, and credit cards carry more interest. Significant purchases are put on hold and managing existing debt becomes a challenge.
Money Tip: Don't let the allure of low rates lure you into unnecessary debt when rates are low. You don't want to put yourself in a tight spot when/if rates increase and you find yourself juggling high interest rate cards and loans.
Borrowing smart aligns with your financial goals – be it homeownership, education, or entrepreneurship.
2. Impact on Savings
Low-Interest Rates – The Savings Sunshine
When the Fed decides to keep interest rates low, it's a bit like the sun shining on your savings account.
The interest you earn might not be hitting the jackpot, but it's a steady glow. It's your money doing a little happy dance while growing, even if it's a gentle shimmy.
High-Interest Rates – A Cloudy Day for Savers
Now, imagine the Fed decides to raise interest rates, it's like a cloud passing over your savings sunshine. Borrowing becomes pricier, but here's the catch – the interest you earn on your savings might also see a boost.
Money Tip: With the Fed keeping interest rates steady, the impact on your savings accounts is noteworthy. Traditional savings accounts may see interest rates holding steady or adjusting slightly.
While it might not be a jackpot, it's a reminder to shop around for the best rates. Consider online banks or credit unions, as they often offer more competitive rates than traditional brick-and-mortar options.
3. Impact on Investments
Now, let's turn our gaze to the investment landscape. The Fed's decision has a ripple effect on various investment vehicles.
Bond prices may experience shifts, impacting returns for fixed-income investors, and the stock market, known for its dance with interest rates, can see increased activity.
Low-Interest Rates – The Investment Groove
When the Fed keeps interest rates low, it's like turning up the volume on your investment playlist. This is especially true for stocks. Low rates make borrowing cheaper, encouraging businesses to expand and increase returns. Investors love that.
Bonds, on the other hand, are not favorable in a low-rate environment, as their returns can be modest.
High-Interest Rates – A Different Beat
When the Fed raises interest rates, it's like a tempo change in your financial song. Stocks might face a bit of a cool down because higher rates mean higher borrowing costs for businesses and lower (if not muted) returns.
But this is where bonds take the spotlight. As rates rise, bond yields can become more attractive.
Money Tip: While interest rates influence investment decisions, a diversified portfolio remains your steadfast ally. Don't let short-term market fluctuations throw you off course. Remember, investing is a marathon, not a sprint.
4. Impact on Homeownership or Renting
Low-Interest Rates – Your Homeownership Fairy Godmother or Rental on Easy Street
When the Fed decides to keep interest rates low, it's like your fairy godmother waving her magic wand over the housing market. Why? Because low rates mean lower mortgage interest rates.
When the average 30-year fixed mortgage rate was strutting around at a tempting 3.5%, it was like having a red carpet rolled out for potential homebuyers - and partially explains why there was a frenzied run up of home prices. Rates were low and borrowing on $400,000 home vs. a $300,000 home was relatively cheap and not a budget breaker.
For renters, low interest rates mean more people are enticed to buy homes, and the demand for rentals might ease up a bit. There are more options, potential negotiation power, and maybe even some wiggle room in your monthly rent.
High-Interest Rates – The Real Estate Balancing Act
When interest rates rise, it's like a gust of reality in the housing kingdom. Higher rates mean higher mortgage costs because the Fed is working to prevent the housing market from overheating.
It also means your monthly mortgage payment will be higher, and over the life of your loan, you could end up paying more in interest. It may not be a deal-breaker, but it's essential to be aware of the financial landscape.
For renters, higher rates may make buying a home a bit less enticing for some, keeping more folks in the rental pool. It could also mean landlords are facing increased borrowing costs, potentially leading to rent increases.
But, remember, it's not just about rates. The real estate market is influenced by various factors, and sometimes, even when rates are high, other conditions might make it a buyer's or landlord’s market.
5. Impact on Everyday Essentials
Low-Interest Rates – The Budget-Friendly Sonata
When the Fed decides to keep interest rates low, it's like a budget-friendly melody. Low rates encourage spending and borrowing, boosting the economy. Sounds good, right?
Well, it is... until it's not. See, the more money flowing, the more demand for goods and services.
And what happens when everyone wants that same cute sweater or trendy gadget? Prices can start to shimmy on up.
High-Interest Rates – The Costly Crescendo
Now, imagine the Fed raising those interest rates. Higher rates mean borrowing is pricier, and folks might tighten their purse strings. That can lead to less demand for goods, creating a bit of a brake on price hikes.
But, there's a catch – businesses facing higher borrowing costs might pass those expenses to consumers through higher prices - and you may find that your low grocery bill slowly creeping up into hundreds of dollars per visit.
Did you know? The average price of food in the United States increased 2.7% in the 12 months ending December 2023 with the expectation that they will increase another 2.1% in 2024. Eating out will also get more expensive as that increase is projected to top 4.9%.
6. Impact on Retirement Planning
Now, let's talk about your future self – the one sipping cocktails on a beach somewhere fabulous.
Low-Interest Rates – A Retirement Symphony
When the Fed keeps interest rates low, it's like a gentle lullaby for retirement planning. It can make borrowing more affordable, which may mean favorable rates on loans you might need in retirement.
On the flip side – lower rates can impact returns on conservative investments like bonds, which many retirees lean on for steady income. Just make sure to consult a financial advisor and ensure your retirement plan aligns with your goals.
High-Interest Rates – A Different Tune
When the Fed decides to raise interest rates, it's like a new tempo in your retirement symphony. Higher rates can mean better returns on conservative investments, which is music to a retiree's ears.
But, it might also make borrowing a bit pricier.
Did you know? The average return on investment-grade corporate bonds, a popular choice for retirement portfolios, currently hovers around 5.3% as of full year 2023. That’s a welcome change from the historically difficult 2022 in which the index recorded its worst-ever annual result of -13.01%.
It's a friendly reminder to balance risk and reward in your retirement investments.
Tips for Navigating Your Money
The Fed’s decision to hold rates is part of a broader strategy to steer our ship through choppy economic waters, so understanding that context is crucial.
As it relates to your money, navigating the Fed’s decision involves a thoughtful approach. Here's our guide to help steer you through this economic landscape:
1. Review Your Current Debts
Low Rates: If the rates are low, it might be a good time to consider refinancing high-interest loans like credit cards or personal loans. This can potentially save you money in interest payments, and will help your bottom line when rates are high and budgets are tight.
High Rates: In a high-rate scenario, focus on managing existing debts efficiently. Prioritize paying down high-interest debts to minimize the impact of rising rates. Here are 3 good ways to pay down debt:
1. The snowball method: Focuses on paying off the smallest debt first while making minimum payments on others. Once the smallest debt is paid off, roll that payment into the next smallest debt, creating a "snowball" effect.
2. The debt avalanche: Allocates extra funds to pay off debt with the highest interest rate first. Once that debt is paid off, move on to the one with the next highest interest rate.
3. Debt consolidation: Combine multiple debts into a single loan or credit card with a lower interest rate. It simplifies payments, as you have only one monthly payment instead of several.
In the end, the most effective method is the one that aligns with your financial habits, motivates you to stay on track, and helps you achieve your debt-free goals.
2. Evaluate Borrowing Opportunities Carefully
Low Rates: If you're considering a major purchase, like a home or a car, low interest rates could be in your favor. Evaluate whether it's a good time to take advantage of borrowing opportunities while rates are favorable.
High Rates: If rates are on the rise, assess borrowing very carefully. Opt for fixed-rate loans over variable rates because fixed-rate loans maintain the same interest rate throughout the loan term, providing stability and predictability in your repayment.
3. Assess Your Savings Strategy
Low Rates: In a low-rate environment, shop around for high-yield savings accounts. Even small interest rate differences can add up over time, contributing to your overall savings growth.
High Rates: Consider diversifying your savings strategy. Combine your high yield savings accounts with short-term investment opportunities to fully potentially benefit from higher interest rates. These short-term investment opportunities can include Certificates of Deposit (CDs), Treasury Securities (T-bills), and Money Market Funds.
Money Tip: We are currently in the high-rate environment right now and most banks are offering high-yield savings accounts with rates over 5% APY - i.e. the rate of interest earned on your savings or investment account in one year.
High yield savings accounts also mean compound interest - something you absolutely want to have when building wealth.
4. Emergency Fund and Flexibility
Low or High Rates: Regardless of the interest rate environment, maintaining a robust emergency fund is crucial. It provides a financial safety net in unpredictable times.It's the peace of mind that comes from knowing you have a financial cushion to fall back on when unexpected expenses arise.
We recommend having a minimum of 3-6 months of funds to cover all of your core living expenses (sorry, Netflix isn’t a core living expense). If you’re a freelancer or self-employed, we recommend 6-9 months.
Did you know? 40% of Americans would struggle to cover an unexpected expense of $400.
Note: Credit cards and loans are not adequate sources of emergency funds as they are considered loans that must be repaid.
We understand that you may have to rely on them in true emergency situations, however they should not be your primary source of emergency funding.
5. Adjust Investment Portfolio
Low Rates: With low rates, the stock market often sees increased activity. Consider a balanced approach, diversifying your portfolio to include a mix of stocks and bonds.
High Rates: In a high-rate environment, focus on fixed-income investments like bonds, which may offer more attractive yields.
In both cases, be cautious about high-risk investments that might promise quick returns. Ensure that your investment choices align with your overall financial strategy and risk tolerance.
6. Stay Informed about Economic Trends
Low or High Rates: Keep an eye on economic indicators and news. Understanding the broader economic context helps you make informed decisions about your financial strategy.
7. Consult a Financial Advisor or Coach
Low or High Rates: If you're uncertain about how the Fed's decisions may impact your specific financial situation, consider seeking advice from a financial advisor or coach. They can provide personalized guidance based on your goals.
Recap and Steps Forward
The recent Federal Reserve decision to hold rates has implications for borrowing, savings, investments, every spending, homeownership, and retirement planning.
It's not just about interest rates; it's about understanding the dynamics that shape your financial landscape.
Now, here's where the rubber meets the road. It's time for action.
Stay informed - make it a habit. Follow financial news, stay attuned to economic trends, and be proactive in managing your finances.
The more you know, the more empowered your financial decisions become.
Remember that your financial journey is uniquely yours. Embrace the uncertainties, celebrate the victories, and keep evolving. Build a support network, seek advice when needed, and be the CFO of your financial destiny. The power is in your hands.
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