Interest rates have been low for a almost a decade to increase spending post-Great Recession. That's changing and sooner than later. The Federal Reserve plans on raising interest rates three times in 2017, with the first rate hike tentatively scheduled for March. Officials plan on meeting March 14-15 to set rate changes.
The probability of the feds actually hiking the interest rate in March is at 52 percent, according to Bloomberg's world interest rate probability tool. The probability has increased steadily in the last week up from up from 34 percent last Monday and 40 percent on Friday.
The U.S. Federal Reserve decided to raise interest rates for the first time in 2016 and the second time in a decade. The rate increased from 0.50 to 0.75 percent. Feds figure it's a good bet to keep increasing the rate in 2017. An additional 2.25 million net new jobs were added to the job market. People are spending money like they have money to spend and the last rate increase actually helped the economy. Core inflation is up .3 percent, closer to the long-term goal of 2 percent. The cost of consumer good increased .6 percent. Dallas Federal Reserve Bank President Robert Kaplan expects the monetary policy to boost the economy through a ripple affect.
Whenever inflation increases from 2-3 percent in a year, the Feds see it as a sign to increase interest rates. The Consumer Price Index, how much basic consumer products cost in a time period, indicates inflation.A hike in interest rates will decrease the amount consumers have to spend and people are less likely to make significant purchases like a home or a car. When demand is less than supply, the prices of consumer products go down. In turn, inflation decreases.
So how's it going to affect you? Higher interest rates make owning and running a business more expensive. Publicly traded companies could have a decrease in stock value. Stock may be cheaper, hence a less expensive investment, but it's a riskier investment. Bonds and other treasury issued bills are much safer investment when interest rates increase. A mortgage, auto loan or any new loan is going to cost more in the longer run. This is the best time to refinance your student loans for a lower rate, before the interest hikes hit. It's a smart idea to pay that credit card bill as son as possible since most credit card interest rates can fluctuate at any time. Interest will compound on credit card debit relatively fast and that means less shoe money.
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When you take out a loan for a car, charge something to your credit card, or get a personal line of credit, there is going to be an interest rate that applies to your loan.
A lot of different factors go into what you will be charged, including your own personal credit score. But even those with flawless credit still see a minimum charge that they can't get around. That all goes back to the Federal Funds Rate.
One thing consumers rarely realize is that all of our banks are lending money to each other every night. Banks are legally required to maintain a certain percentage of their deposits in non-interest-bearing accounts at the Federal Reserve to ensure they have enough money to cover any withdrawals that may unexpectedly come up. However, deposits can fluctuate and it's very common for some banks to exceed the requirement on certain days while some fall short. In cases like this, banks actually lend each other money to ensure they meet the minimum balance. It's a bit hard to imagine these multibillion-dollar financial institutions needing to borrow money to tide them over for a bit, but it happens every single night at the Federal Reserve. It's also a nice deal for those with balances above the reserve balance requirement to earn a bit of money with cash that would normally just be sitting there.
The Federal Reserve
The exact interest rate the banks will charge each other is a matter of negotiation between them, but the Federal Open Market Committee (FOMC) (the arm of the Federal Reserve that sets monetary policy) meets eight times a year to set a target rate. They evaluate a multitude of economic indicators including unemployment, inflation, and consumer confidence to decide the best rate to keep the country in business. The weighted average of all interest rates across these interbank loans is the effective federal funds rate.
This rate has a huge impact on the economy overall as well as your personal finances. The federal funds rate is essentially the cheapest money available to a bank and that feeds into all of the other loans they make. Banks will add a slight upcharge to the rate set by the Fed to determine what is the lowest interest that they will announce for their most creditworthy customers, also known as the prime rate. If you have a variable interest rate loan (very common with credit cards and some student loans), it's likely that the interest rate you pay is a set percentage on top of that prime rate that your lender is paying. That's why in times of low interest rates (it was set at 0% during the Great Recession), a lot of borrowers should go for fixed interest rate loans that won't increase. However, if the federal funds rate was relatively high (it went up to 20% in the early 1980's), a variable interest rate loan may be a better decision as you would be charged less interest should the rate drop without the need to refinance.
The federal funds rate also has a major impact on your investment portfolio. The stock market reacts very strongly to any changes in interest rates from the Federal Reserve, as a lower rate makes it cheaper for companies to borrow and reinvest while a higher rate may restrict capital and slow short-term growth. If you have a significant portion of your investments in equities, a small change in the federal funds rate can have a large impact on your net worth.
Whether you're leaving a job involuntarily, departing for something new, or just want to prepare for the unknown, it is smart to understand all your options regarding your 401k.
Frugal gifting often gets a bad reputation. However, this shopping method does not make you cheap — it makes you practical. Frugal gifts often avoid waste and overspending and can be just as meaningful (if not more so) as any other present.
With the National Retail Federation predicting each consumer this holiday season to spend upwards of $1,000 on holiday gifts amidst an economic recession —this year might be the perfect time to reconsider your spending budget. We've formulated the ultimate list of frugal gift-giving ideas to get you started.