On November 1st and 2nd, the Federal Reserve Board held its seventh of eight scheduled meetings for 2016. What did they decide about interest rates, and what are the implications? Here’s a brief recap of what happened and what it means for you.
The Federal Interest Rate
The anxiety surrounding the Fed meetings has been slowly building all year. At the end of 2015, they voted to raise the interest rate for the first time in several years, after its having remained steady at near-zero since the 2008 financial crisis.
Then in December of last year, the rate went from a range of 0-0.25%, to 0.25-0.5%. It was a small hike, but the implications were significant: the days of free money were over. Now that they considered the economy back on its feet enough to raise them, it was just a matter of time before the rates went up further.
Furthermore, the Fed indicated interest rates could be raised up to four more times in the coming year. So far, they have yet to do so, but in each meeting it’s a possibility, and even when it doesn’t happen, we’re still one step closer to the inevitable.
During the latest meeting, most people were fairly certain that a rate hike was unlikely. And indeed, it didn’t occur. After all, the Fed would never vote to raise interest so close to an election. It would cause market volatility and even outright panic from the American people, right as our government is at a critical juncture. Particularly since the effects on the economy would be different depending on who won, it seemed wise to hold off until they could gauge what they might be.
Looking Toward December
Because they voted not to raise the rate in November, all signs increasingly point to a hike finally going into effect at the December meeting. Fed Chair Janet Yellen has said that interest would likely go up by the end of the year, as long as the economy remained strong and employment continued to go up.
As it happens, just before the November meeting, the advance estimate for the third quarter GDP was released. It indicated a growth of 2.9%, a startling 1.5% higher than the second quarter’s final estimate. The number isn’t set in stone yet, but it does seem to indicate that the economy is on its way up. So the stage is set for a rate hike at the end of the year.
What a Rate Hike Means for You
So what happens if they do raise interest in December? The long term effects ultimately lead to recession: a drop in the markets, slowed business growth, lower disposable incomes, and higher prices. Given a variety of other factors pointing to another economic collapse in the near future, that outcome seems likely, even if things are improving in the short term.
The path from an interest rate hike to a recession is a ripple effect, though. It can take years to take hold, though most likely sooner than that under current circumstances. In the meantime, there are more pressing results that you can see around you.
The immediate reaction to rising interest rates, regardless of economic conditions, is panic from investors. Markets go down as investors begin selling their stocks in anticipation of the economic turmoil to come. The mere possibility of a recession causes market volatility.
Knowing, or at least fearing, the loss of business growth that a rate hike generally means, prompts people to want to get their money out of the markets before they begin going down. That panic causes stocks to drop. At the same time, investors are looking for a safe haven to protect their assets. This leads to a higher interest in gold, which then begins to rise from increased demand, as everything else is falling.
What does this mean for you? Well, knowing a rate hike is increasingly likely in December, you can take steps to protect your assets now, before the panic sets in. Sell your stocks while they’re reasonably high and buy gold while it’s relatively low. Then when the recession does hit, and everyone else is losing their nest egg, you’ll be protected, and your future will be that much more secure.