In the middle of December, the Federal Reserve made history. For the first time since 2006, they raised the key interest rate to the 0.25-0.5 percent range. The move, which had been widely expected and long anticipated, was both an important and monumental one.
According to Federal Reserve Board Chair Janet Yellen, the economy has healed enough since the Great Recession that there is no longer a need for near-zero rates. In 2008, the Fed cut rates to their record low amidst the housing market fallout and mass employment turnover.
The moves by the Fed have an effect on all parts of the economy, from big businesses to the average consumer.
With the Fed indicating that further increases are in store for the future, you should know how these gradual increases affect you, particularly when it comes to savings and investing.
Interest rates and saving
If the Fed stays true to its word and keeps incrementally raising rates, this is good news for savers. According to the Federal Deposit Insurance Corporation, the average national rate for savings accounts is currently 0.06 percent. To put this into perspective, you'll earn $6 in interest by keeping $10,000 saved.
Certificates of deposit have similarly low rates, and as a result, some individuals and families have been looking for high-yield accounts, which typically come with rates near 1 percent.
Unfortunately, it will take some time for banks to adjust their savings rates accordingly. This is a result of many bank products not being directly tied to the key federal funds rate, USA Today explained.
Even so, you can still benefit as rates gradually increase. If you don't have a savings account at the moment, you can start shopping around for one to sign up for. Don't get discouraged by the current low rates, because they will eventually increase.
In an interview with CBS News, David Lafferty, chief marketing strategist at Natixis Global Management, said he expects interest rates to increase another 75 basis points this year, which equates to another two to three hikes.
Once you have your savings account, you can deposit money as you normally would. Try to build an emergency fund while utilizing a CD for longer-term savings and goals, such as money for a down payment.
Effects on investing
When interest rates are increased, the effects on the stock market and investing differ than when looking at savings accounts. According to U.S. News & World Report, investors shouldn't necessarily worry about higher rates. However, it should be kept in mind that some industries will react differently - positively - than others. As such, investors have to be a little more careful with where they choose to invest.
As with any financial news, the stocks will immediately react, but eventually settle down. This is, in fact, good news.
However, specifically pointing out the effects of interest-rate hikes on the stock market is not as simple as it is when looking at savings accounts. The economy is always reacting to daily happenings, and the same applies to interest rates. It is not possible to say an interest-rate hike will therefore have a negative effect on investing.
Historically, Bob Doll, chief equity strategist at Nuveen Asset Management, told CNBC the market will react as follows:
- Substantially up two weeks prior to a hike
- Average gain of 2.6 percent in the following 250 days
- Normalcy returns after 500 days
As the days, go by, you should keep a close eye on news surrounding the Federal Reserve. It didn't raise rates during its January meeting, but there is a good chance more hikes will occur throughout 2016, and these will have an impact on your savings and investments.
For more information about smart ways to manage your finances, contact Landmark Bank.
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