The Federal Reserve raised interest rates by 0.25% yesterday and announced they plan only one more rate increase in 2023.
This hike has been expected for some time, but has been dramatically impacted by the banking crises that are still unfolding globally. If it weren’t for the SVB and Signature Banks’ collapse alongside First Republic and Credit Suisse’s rescues last week, the Fed would’ve likely raise the interest rate much higher. The Federal Reserve and many governments are walking a delicate tightrope right now – trying to mitigate the impacts of the looming (read: very likely) recession and trying to bolster consumer confidence in the economy and financial systems. In their meeting yesterday, they said they expect only one more rate increase in 2023. There’s been a lot written about each of those crises and the recession that will impact our lives, but what do interest rate hikes actually mean to you and your financial planning?
Near term impacts: Consumer costs and spending will likely continue to grow. When interest rates go up, loans get more expensive for businesses. The way that businesses try to offset these growing costs is by passing some of their costs along to consumers = inflation.
- As a consumer, continue to review your spending budgets and expect that – at least for the next year – your everyday costs will be more expensive. Keep shoring up that emergency fund as much as possible and keep your liquid assets available.
- If you’re a business owner, again, expect that interest rate hikes make capital and loans more expensive. If you have excess capital or healthy margins, do as much as you can to bootstrap your business (control expenses) until rates stabilize or there’s less anxiety – and fluctuations – in the market.
Longer term impacts: Over the last couple of years, the markets have been a bit like riding a rollercoaster. And the downward trend was enough to make your stomachache. This has been in response to tremendous growth, especially in the tech sector, that’s now being adjusted as everyone expected that growth to continue untethered.
- In terms of your investing, the markets are currently struggling. That doesn’t mean you should take action! We know from history there’s always a recovery after crises. We’re in the midst of the crisis right now. For some investors it’s the chance to ‘buy low’. For others with a lower risk tolerance, it means taking the safe route = CDs and money market funds. If you are looking at solid, guaranteed and liquid returns, you should consider 1-2 yr. CDs. These rates are over 5% currently.
Interest rate fluctuations, just like market volatility, aren’t ‘good’ or ‘bad’. They’re just part of the economic cycle. Remember it’s all cyclical – and it just takes time to for the markets and the economy balance out.
If you’re feeling anxious or have any questions about how this period affects your specific financial goals, we’re always here to help for a quick call or a broader review of your financial plan.