I don’t normally talk much about current events. I like to give my readers financial info that will be helpful to them at any point – not just when I write about it.
But when something major happens I want to make sure and tell you all about it. After all, it could impact you for years to come.
The Federal Reserve has finally raised interest rates. This will be the first increase since 2006 – before the Great Recession. And it will be the first time the rates have been effectively higher than 0% since 2008.
So What Does This Mean for You?
The Federal Funds Rate is:
The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight.1
What that means is banks and other financial institutions loan each other funds at the rate the Federal Reserve establishes. If the rate is low, then the amount of interest you’ll earn on your savings account will also be low. And the amount of interest that banks and other lending institutions will charge you for loans will be low.
The Fed has kept interest rates low for an unprecedented amount of time, because the American economy was in dire straits for several years. And keeping rates low helped bolster up the economy.When rates are low, it encourages businesses to invest in capital, rather than save money. It also encourages consumers to spend, because they won’t earn much interest in a savings account. And it encourages consumers to take out loans, because the interest rates are lower.
But even though the lower Federal Funds Rate has helped improve the economy, they can’t keep it this low forever. Check out the chart below to see the changes in the Federal Funds Rate since 1952. You’ll see that the rates have been lower in the past 7 years than they were in the 56 preceding years.
So, the rates had to go up at some point. First of all, a low interest rate penalizes savers. In particular, it penalizes senior citizens who have saved their entire lives and planned on living off of interest from safe investments such as CDs or money market accounts. With rates this low, they may not be able to do so.
For example, let’s say a couple had saved their entire lives and managed to scrape together $500,000. They would only be able to earn $5,000-$10,000 a year at current CD interest rates. Of course I realize that they would still be in a better position than people who had saved less. But it would still be hard to get by when they they had planned on earning $20,000-$30,000 per year.
Also, when the economy is stronger, as it is now, inflation can increase. Increasing the Federal Funds Rate can help to curb inflation, which is one of the major goals of the Federal Reserve.
The increase the Fed made today is only one quarter of a percent. But they plan on incrementally increasing by another quarter or half of a percent throughout the next year.
This means that the rates on your savings accounts should increase. At the same time, future mortgage rates will also increase. So if you’re thinking about buying a house, you might want to do it sooner rather than later.