The Fed Raised Interest Rates! Learn How This Change Could Affect Investors.
Financial news media and investors are focused on the recent 0.25% interest rate hike. It's the first of potentially six more to come this year. We'd like to help explain why and how this rise in rates could affect your investments in the stock market.
An Interest rate is the cost someone pays to borrow someone else's money. The Fed's intention with the interest rate hike is to increase how much it costs for people to borrow.
The interest rate that impacts the Stock Market is called the Federal Funds Rate. This is the rate institutions like banks, savings/loans, and credit unions charge each other for overnight loans. One way the Fed attempts to control inflation is by influencing this rate. When the Federal Funds Rate increases, financial institutions will in turn increase their borrowing rates affecting how much it costs average consumers to borrow money from them. This hike is an attempt to shrink the money supply available to make purchases. If borrowing money is more expensive then people are less incentivized to do it.
What do higher interest rates mean for the stock market?
Individuals' spending habits are typically impacted because they are left with less disposable income as bills (mortgages and credit cards) become more expensive. Companies are affected by two factors: higher interest rates (borrowing costs) and diminishing consumer purchasing. Less consumer spending negatively affects companies' revenues. These two factors can affect company earnings which will negatively weigh on the stock market for a time.
If enough companies experience declining stock prices the whole stock market will go down - FOR A TIME. You may not like the look of your investments during this time but as always, we suggest holding. Try not to make any emotional decisions because the market will eventually bounce back just as it has always done before.
Remember, there is no guarantee about how the market will react to any given interest rate change. If you'd like to talk through your investment portfolio with any of our Financial Advisors, please schedule a call.