Watching the Federal Reserve and anticipating what they will do next seems to be a reoccurring preoccupation of many investors and consumers as well.  Why do we care?

The Federal Reserve sets the federal funds rate.  This is the rate that banks charge each other for short term loans.   Other interest rates usually adjust in response to the movement of the federal funds rate.   Such changes can have a significant impact on consumers in many ways. For example, when the interest rate charged by lenders is raised, the cost of borrowing increases as well.  So big ticket items like houses, cars, etc. will cost more.  Interest rates on credit cards will likely respond to changes in the fed rate as well. A rise in such rates may slow consumer spending and that can result in lower sales for companies, which in turn can impact economic growth for a specific industry or even the whole country.  Slower corporate growth can affect the job market, resulting in fewer jobs available and more unemployment.  On a positive note, higher interest rates will result in savings accounts and other fixed income investments paying a higher rate.

Lowering the federal funds interest rates can set up the same domino effect on other rates but in reverse:  lower rates on borrowing, consumer spending will rise, which can encourage corporate growth and hence job opportunities.

Generally, and given the possible impacts, thankfully, the Federal Reserve makes small incremental changes at a time.

For investors, changes in interest rates can create opportunities as well as a need to perhaps rebalance.  Bonds are particularly sensitive to interest rates.  As rates rise the value of existing bonds typically fall.  This is because new bonds will be coming out with higher interest rates, which are more attractive to investors.  The reverse is true when interest rates fall.  In this scenario the value of existing bonds typically rises.

Stocks react similarly to the overall economy.  Higher rates may stagnate growth due to increased costs to borrow.  Lower rates can stimulate more growth.  Of course, some industries are more sensitive to interest rate changes than others.

The movement of the federal reserve rate is but one of the many factors our financial analysts must consider when doing their research.  For a more complete discussion about interest rates and the various effects on stocks and other investments, give us a call.

Sara-Bay Financial has been doing their own research for 30 plus years.  We must be doing something right!   Consider partnering with Sara-Bay.

The information in this article is a compilation pulled from a variety of sources.  The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing