In December of last year, the Federal Reserve made the decision to enact another interest rate hike—its second in as many years. This one took it from 0.5% to 0.75%. What’s more, they anticipate three additional rate hikes during 2017. What does this mean for the economy? What does this mean for you?
Past Rate Increases
For seven years, the interest rate held steady at, effectively, 0%. The Fed made this decision in December of 2008, in order to help the economy recover after the financial crisis. Then, in December of 2015, they raised it to a range of 0.25-0.5%, with the promise of up to four more rate hikes in the year following.
A variety of economic circumstances caused them to revise their plans, and in the end, they didn’t raise the rate again until December of 2016. However, whereas previously they had anticipated only two more rate raises in 2017, they have revised that projection to 3.
The Fed’s forecast isn’t a hard and fast rule, but merely an analysis of the current state of the economy and how they are likely to respond to it if trends continue. Therefore, it’s possible that this projection will fizzle, just as the ones from 2016 did. Some experts believe that we’ll see only one rate hike this year. Still, there’s also the very real possibility that all three increases could go through as planned. What will happen in that case?
The Effects of Interest Rate Increases
The federal interest rate is the rate at which the Federal Reserve loans money to banks and other institutions. This in turn dictates how much interest those institutions charge to their customers. Increasing the rate therefore means higher mortgages, credit card rates, etc.
However, even if you have neither a mortgage nor a credit card, you’re still affected by a rate hike. For those who do have them, higher payments mean less disposable income. This in turn causes businesses to suffer. Stocks fall, and prices rise to make up for the reduction in business. This ends up making things less affordable even for those whose disposable incomes aren’t being depleted.
At the moment, the interest rate is still reasonably low. That, combined with the slow rate at which it’s been going up, have managed to minimize the potential damage. However, to raise the rate three times in the course of a year could prove to be too much, especially as the current economy is so precarious. If it goes up too high too fast, it could end up plunging us into another recession.
What the Future May Hold
Even just the announcement of a rate hike tends to cause market volatility, due to investor panic at the possible repercussions. Once it actually goes into effect, the effects might not be as bad as projected, but there can still be a significant slump in the markets, and in the economy in general.
So, will the Federal Reserve choose to proceed with its three planned rate hikes for this year? Only time will tell. But regardless, it’s important to protect your own assets against the results of such a hike.
Make sure that a portion of your savings is invested in a safe haven, that’s independent of the markets. That way, in the event that there is a market slump on its way, or even another crash and recession, you’ll have something to fall back on, rather than risking losing your nest egg.