What You Should Know About the Fed and Interest Rates

The average person should care about what the Federal Reserve (often referred to as "the Fed") does with interest rates because these decisions can have a significant impact on their personal finances and the broader economy. Here are some ways the Feds decisions affect you.

1.??? Borrowing Costs: Interest rates set by the Fed influence the rates you pay on loans and credit cards. When the Fed raises rates, banks typically pass on those higher costs to consumers, making it more expensive to borrow money. This affects mortgages, auto loans, student loans, and credit card debt. So, if you're planning to take out a loan or have existing loans, changes in interest rates directly impact your monthly payments.? While borrowing costs are important, and perhaps obvious, effects of higher interest rates also include making it tougher to get approved for a loan.?

2.??? Savings and Investments: Higher interest rates can lead to better returns on savings accounts, CDs, and other fixed-income investments. On the flip side, they can make borrowing more expensive. If you have a savings account, invest in bonds, or hold investments affected by interest rates (like stocks, which can be influenced by broader economic trends), you should pay attention to Fed policy to make informed financial decisions.? Higher interest rates will make the price of bonds decrease, which means money in a bond fund will decrease in value.? Stocks of companies that depend on debt will likely decline as well.

3.??? Job Market: The Fed's interest rate decisions can influence job growth and unemployment rates. Lower interest rates can stimulate economic activity and job creation, while higher rates can slow economic growth. As an employee or job seeker, the state of the job market directly impacts your career prospects and earning potential.

4.??? Inflation: The Fed aims to keep inflation in check. When it raises interest rates, it's often in response to concerns about rising inflation, as in our current situation. High inflation erodes the purchasing power of your money, meaning you can buy less with the same amount of money. By controlling inflation, the Fed helps to maintain the value of your earnings and savings.? In other words, money in fixed investments might earn more interest, but will likely still trail inflation.

5.??? Housing Market: Interest rates play a significant role in the housing market. Lower rates can make it more affordable to buy a home, while higher rates can increase the cost of homeownership. If you're in the market to buy or sell a house, the level of interest rates can impact your decision and the price you pay or receive.? Higher rates often lead to lower house prices, but not always since supply and demand for housing is also a major factor in housing prices.

6.??? Consumer Confidence: Consumer confidence is closely tied to the economy's overall health and the stability of financial markets. When the Fed makes significant policy changes, it can affect consumer sentiment and spending habits, which can, in turn, impact the broader economy.? Higher interest rates often lead to less debt based purchasing, so it can decrease consumer confidence.

7.??? Retirement Planning: If you're planning for retirement or already retired, interest rates can affect your investment returns and the income you receive from fixed-income investments like bonds and certificates of deposit (CDs). It's essential to consider how interest rate changes may affect your retirement portfolio and income.? Even if your investments earn more, they could be hurt by inflation, so it’s important to watch both.? Higher rates can actually harm your retirement assets depending on where they are invested.

?

I suspect that the average person doesn’t understand enough about the impact of changes, especially increases, in interest rates.? It’s important, especially for DIY investors to pay attention and for others to make sure their advisors are paying attention to the impact of interest rates on their financial picture.