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- Ashley Isreal
- March 22, 2023
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Against the backdrop of two banking collapses, the Federal Reserve raised interest rates by 25 basis points on Wednesday.
Following the downfall of Silicon Valley Bank and Signature Bank this month, many speculated as to whether the Fed would take a break from its battle against inflation or even reduce interest rates. However, in an unanticipated turn of events, the Federal Reserve chose instead to push forward with another hike in their federal funds rate target range – 4.75-5% – marking it as their ninth consecutive rise since March 2022. This decision has been seen by some financial eagle-eyed observers as being indicative of a powerful yet hawkish stance on inflation control taken by the central bank.
As news broke this week that the Federal Reserve raised interest rates for the second time in three months, many people are still unsure of what that means and how it affects them. While these changes may seem insignificant at first glance, they can have a significant impact on our personal finances, investments, and savings. In this blog post, we’ll discuss the recent rate increase and why it matters to you—giving you all the information needed to make smart financial decisions now (and in the future).
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Learn the Fundamentals of How Interest Rates Rise
The Federal Open Market Committee sets the federal funds rate, which is the target interest rate at which banks borrow and lend money to one another. This rate has a major impact on everything from mortgage rates and car loans to credit card interest rates. When this rate rises, making loan payments becomes more costly for both businesses and consumers alike; yet that’s something worth considering in order to slow economic growth down while controlling persistent inflation levels according to the Fed’s perspective.
In the past, the central bank had declared that inflation would die down soon enough. However, they have been forced to take more drastic measures in order to contain it. Within one year alone, the Fed has dramatically upped their federal funds rate target range from 0-0.25% up to 4.75-5%. Clearly, this is a testament to how serious of an issue inflation can be and why decisive action must be taken immediately!
While the Consumer Price Index (CPI-U) – a metric used to gauge inflation – has declined from its forty year peak of 9.1% in June, it is still 6%, above the 2% target set by the Federal Reserve. This calls for an assertive response on their part, as we continue to face a period of high inflationary pressure.
Consequently, Federal Reserve Chairman Jerome Powell declared before the Senate Banking Committee on March 7 that greater rate hikes may be imperative. Nonetheless, this declaration was made prior to both Silicon Valley Bank and Signature Bank facing insolvency, which has led some individuals to suspect that the Fed might pause or even reduce interest rates.
How the Recent Interest Rate Increase Affects Your Retirement Plans
Wednesday’s rate rise may leave some retirees and others living on fixed incomes feeling the pinch—here are a few of its implications.
The Worth of Cash Increases
As interest rates rise, banks are able to pass on the benefits of higher yields in terms of APYs on savings accounts and other deposits. Even though inflation causes cash to become less valuable over time, a hike in interest rates means money held in reserve will generate more income than it did before. This becomes especially beneficial for retirees who are typically suggested to maintain between six months and two years’ worth of cash on hand, in order to cover their short-term living costs. The increase in interest rates means that the same amount of savings will work even harder – some banks offer high yield accounts with an impressive 4% or more rate!
Investors May Earn Lower Returns with I Bonds and TIPS Investments
If inflation declines due to Wednesday’s rate rise or any other future rises, both Series I savings bonds and Treasury Inflation-Protected Securities (TIPS) – two types of bonds issued by the U.S. government for protection against the rising cost of living – will no longer be as lucrative investment options. Every six months, the Treasury adjusts interest rates on I Bonds in correlation to changes in the CPI-U. Recently, this adjustment resulted in reduced I Bond interest from 9.62% to 6.89%. The next rate reset will occur on May 1st of this year. On the other hand, TIPS operates differently; its principal value is modified by inflation instead of its associated interest rate changing with CPI-U movements as an I bond does.
Is the Stock Market Trending Downward?
It’s hard to predict the consequences of this latest rate increase on stocks in the following days and weeks. Still, it is common knowledge that stock prices usually decrease when interest rates rise – like what happened last Wednesday when all three major indices – NASDAQ, Dow Jones and S&P 500 were down by at least 1.60%. Typically, a higher-interest environment impedes economic progress and limits access to finances for businesses. Wednesday’s statement from the Fed left it ambiguous if further rate hikes are in store, indicating that “some additional policy firming may be necessary,” without expressly declaring more increases will occur.
Final Verdict
On Wednesday, March 22nd, 2023 the Federal Reserve raised interest rates by a quarter of one percent to 4.75-5%, signifying great news for retirees relying on cash deposits as their main source of income. Those individuals will now be able to enjoy higher returns through greater interest earned! Nonetheless, those with Series I savings bonds must pay close attention to the Treasury’s upcoming May adjustment as it could change how Wednesday’s increase will influence their investments. It is fascinating that stocks experienced a slight drop after the Fed’s statement on Wednesday.
Strategies for Tackling Inflation
- Investment Opportunities: Investing in stocks or mutual funds is another great strategy for combating inflation. With the right investments and a sound financial strategy, investors can take advantage of potential market gains while minimizing risk exposure through diversification across different asset classes. Investors should carefully research each investment opportunity before committing any funds and should seek professional advice if necessary. Additionally, purchasing gold or other precious metals may prove beneficial in times of economic uncertainty due to their ability to preserve wealth when other markets experience drops in value.
- Real Estate Investments: Property investment can also be an effective way to hedge against inflation because it typically appreciates along with price increases. In addition, real estate investments often provide many other benefits such as rental income and potential tax savings. For those looking for a long-term investment strategy that could help mitigate their losses due to inflation, real estate investments offer both stability and profitability.
- Diversify Your Portfolio: Diversifying your portfolio across different asset classes is another great way to hedge against the risks posed by rising prices and costs of goods and services due to inflation. A diversified portfolio should include stocks, bonds, mutual funds, commodities, currencies, real estate investments, and other assets which have a low correlation with each other – thus reducing risk while generating higher returns over time. Furthermore, spreading out your investments across various asset classes allows you to benefit from the growth potential of different markets while minimizing losses due to market corrections or economic downturns.
