Rising interest rates affect credit cards, mortgages and the stock market
For the first time since 2018, the Federal Reserve raised interest rates last week by 0.25%. The Fed also announced that this would not be the only interest rate hike this year. In fact, it indicated that we would see six more rate increases in 2022.
Unsurprisingly, immediately after the Fed’s announcement, stocks fell; however, as investors caught their breath and watched the announcement, stocks rallied and markets turned, and as the market closed, the Dow Jones added over 500 points.
I mention this just to emphasize how difficult it is to predict short-term market movements. I’ve always said it’s a fool’s game trying to time the market, because you have to be right twice – once when buying and once when selling. In the history of investing, no one has been able to do this consistently, so you and I shouldn’t try.
You may be wondering why the federal authorities are raising interest rates. The short and simple answer is that it is trying to rein in inflation. Inflation is at its highest level in 40 years, and the fear is that if inflation continues to rise, we risk the economy going into recession – which no one wants. Therefore, the Fed hopes that the rate hike will reduce spending, thereby preventing the economy from a recession.
Will it work? I don’t know, but I do know that as an investor I’m glad the feds are doing something to stop prices from continuing to rise.
Rising fares impact consumers like you and me. For those of us who borrow money, we can expect the cost of money to rise. This means, for example, that if you have a variable rate credit card, your interest rate will increase. In addition, rates for auto loans and personal loans will also increase. Also, even though the Fed announcement only affects short-term interest rates, you can expect mortgage rates to rise. I think the days of getting a 30 year mortgage at less than 4% are probably over.
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Rising interest rates can also benefit investors. For those of you with no debt or fixed interest rate debt, higher interest rates may benefit you as the interest rates you receive at the bank may increases. Of course, don’t expect the rates we receive as savers to increase overnight. You can expect the interest we pay to grow much faster than the interest we receive.
If you are in debt, this should be a wake-up call to re-examine your situation and be aggressive in paying off high-interest debt. Rising rates should provide the impetus to seek ways to refinance your debt. If you can transfer credit card debt to a lower interest rate credit card, why not? After all, the money you save stays in your pocket, right where it belongs.
As savers and investors, rising interest rates will become a reality – we can’t change that. However, by being proactive, we can look for ways to better position ourselves so that rising interest rates are just another roadblock in the way of achieving our financial goals.
Rick Bloom is a paid financial advisor. His website is www.bloomadvisors.com. If you’d like him to answer your questions, email [email protected]