The Federal Reserve Raised interest rates today! It’s HISTORIC! It’s the FIRST ONE IN NEARLY A DECADE!
WHAT HAPPENS NOW!?!?! AGGGGHHHHH!!!!
No Real Changes From Interest Rate Increases
As we’ve discussed a bit before, there really isn’t as much big news in today’s announcement as you might think. First of all, this has been the most expected interest rate hike in history, so there is no one out there making rash decisions. In fact, there might have been more trouble if the Fed had not raised interest rates since that would have actually been surprising.
In other words, the stock market, the bond market, and every market in between was already planning for, and pricing in today’s interest rate increase. This is why the stock market basically kept going the way it was already going before the meeting’s results were announced.
Increases In Consumer Loans?
Theoretically, an increase in the target interest rate from the Feds should raise the cost of consumer borrowing as well. However, a lot of credit products these days have minimum interest rates, and many products are still going to be at that minimum rate.
For example, a credit card might have an interest rate of prime + 10% with a minimum rate of 12%. In this case, the prime rate was quickly increased by 0.25% just like the Fed rate. However, the prime rate was 3.25 percent before, the increase, and it’s 3.50 percent now. Neither one plus 10 percent goes above that minimum rate, so the credit card interest rate is still 12 percent.
Long-Term Effect of Interest Rate Increases
The reality is that this increase is largely psychological. It’s been so long since interest rates were increased, that there are literally adults paying mortgages that have never seen an increased rate, unless they paid attention to financial news as teenagers.
This one, tiny, increase is largely insignificant. The real issue, of course, is what happens next. the Fed went out of its way to say that rates would rise slowly. This is important since the economy isn’t exactly roaring, and the global economy is doing worse. Inflation is non-existent right now. In fact, the Fed termed this increase as “preemptive” meaning there isn’t necessarily a reason to raise rates now, but it wants to make sure it has control of the situation.
In the end, if the Fed raises rates 0.25% every quarter next year, like some analysts predict, then rates will hit just 1.25 percent by the end of the year. THAT will actually have a change in the overall economy, but assuming the Fed is actually watching the data, and not just trying to impress the “hawks” then, that will also mean that the economy is finally building some strength.
For you shorter-term traders, it’s time to start reanalyzing which, if any positions, you have that are weak with too much debt, or whether you plan to sell those bond funds in the coming year. If so, after today, there might be a little less capital gains on the plate, or even some tax-loss harvesting that can occur.
As always, for you retirement, and long-term investors out there, keep your long-term goals in mind when thinking about your long-term investments and disregard news like this.