After nearly a decade without a move, the U.S. Federal Reserve (a.k.a., the Fed) raised the federal funds rate by 0.25 percent in December 2015. This could be considered a historic moment because it was the first rate increase since 2006. The Fed has made several small increases since then, and you can find the most recent rate changes here.
What does this mean for your personal financial journey? Should you respond by adjusting your course? As our clients’ financial guides, when it comes to economic issues beyond our control, we usually recommend only acting on factors that significantly impact your path towards your goals.
That said, let’s look at some insights about the Federal Reserve funds rate
What is Going on?
Of the various functions the Fed performs, the most headlines are grabbed by monetary policy. The Fed is always wrestling with the federal funds rate – when it should be raised, by how much, and how often.
Economic media often report their speculations on outcomes as “fact,” and the market responds accordingly. The truth is that these outcomes aren’t determined until the white smoke pours from the chimney, but predictions will always be made.
As is always the case with buzz, the conflicting coverage tends to leave investors wondering what may or may not happen. Depending on who you listen to, higher federal fund rates can be a magic bullet, a worldwide disaster, or much ado about nothing in the markets.
So What Does This Mean for You?
First, for those that are more inquisitive or analytical, it may help to consider the complex interaction between the monetary policies of developed nations, global interest rates, and the market itself. Anyone who claims to know the exact outcome in one corner of the market when action is taken in another corner will probably sell you beachfront property in rural Iowa for real cheap (in other words, they are making claims that the facts can’t cash).
For example, in this March 2018 piece, Wall Street Journal columnist Jason Zweig critiques brokers for their weak account yields despite rising interest rates: “The Federal Reserve has driven short-term interest rates up a full percentage point since late 2016; one-month Treasury bills were yielding 1.6% this week. But you’d never know any of that from looking at the
returns on the cash in your brokerage account.”
This example illustrates the fact that the only interest rate the Fed has direct control over is the U.S. federal funds rate, which is the rate that banks use to lend and borrow funds from each other in the overnight market. There are multiple far-reaching, international factors at play, and the Fed’s actions are only one among many.
What Should You Do?
When figuring out the best response to the ripples sent by the rising and falling waves of interest rates, our first question should always be: What can I do about it? Start by focusing within your own sphere of influence – including your personal wealth portfolio.
First off, ask yourself: Is my financial plan aligned with my goals? This question is the guiding principle we look to before shifting direction in anyone’s portfolio. If you do not have a clear financial map or a guide for your financial journey, now is a great time to chart your specific course.
Understanding where you are right now and where you want to be in the future, is always a good idea. If you’re trying to figure out your financial goals, please check out the Wealth Perspective tool we created to help identify what might be most important to you in retirement.
Second, be aware that the behavior of interest rates can have a multi-level impact on your wealth: saving, investing, and spending can all be affected. A consultation with a wealth manager can help you make decisions based on your unique situation instead of trying to keep up with the ever-changing financial news.
In any interest rate climate, we can help to put these global events in focus for you, so you can make informed judgments within your own financial portfolio. Is your end game to understand how the Fed works or is your end game making better financial decisions?
These are some of life’s most important decisions, and factors over which you can have the most control – for better or worse. Reach out to us today to find out how we can help you stay on track toward reaching your goals and beyond.