The Federal Reserve Board & Interest Rates

12/18/23

The U.S. market reacted positively to the news last week that the Federal Reserve did not increase interest rates, and many believe they will even start to decrease rates in 2024. Let’s take a look at what this means.

The Federal Reserve Board is a group that meets once per month and makes decisions that impact the interest rates on money that financial institutions [like banks] loan to customers AND the rates that these institutions pay to borrow money from customers. This is used to control inflation and spending.

If interest rates increase, spending slows because you are:

1.       Less likely to borrow money & spend since the overall cost will be higher

2.       More likely to keep money in the bank since the interest rate paid to you will be higher

A slowdown in spending eventually leads to a slowdown in inflation.

If interest rates decrease, spending increases because you are:

1.       More likely to borrow money & spend since the overall cost will be lower

2.       Less likely to keep your money at the bank since the interest rate paid to you will be lower

An increase in spending eventually leads to an increase in inflation.

Now let’s get back to the current day. The Federal Reserve announced they would not increase rates, meaning that inflation has slowed because of their previous rate hikes, and they seem confident that it will continue to slow.

How can you use the current interest rates to your advantage?

1.       Consider investing your cash/safe money in a money market account (liquid & much safer than most investments), which pays a higher interest rate than a regular checking or savings account. Talk to me about whether this is right for you.

2.       Consider investing your cash/safe money in a product that locks you in at a current interest rate for a specific time frame while interest rates are high (relative to the last few years). These funds are not liquid for a specific amount of time but extremely safe. Talk to me about whether this is right for you.

3.       Avoid taking out unnecessary loans no matter the interest rate because any interest always adds to your overall cost, slowing down your financial progress. Pay cash if possible!

4.       Continue your commitment to your long-term financial goals. Don’t let short term factors outside of your control affect your long-term vision.

*This article is not meant to give specific advice. Contact me to discuss what is appropriate for your specific situation.