Written By Keith Wirtz, Chief Investment Officer, Union Savings Bank
In mid-March, it was announced that the Fed raised interest rates for the first time since 2018, which is an important news moment for investors. For the last two years, the Federal Reserve has been providing an accommodative policy in support of the economy. This policy was put into place when the COVID-19 pandemic began in March 2020. That accommodation is now ending, and their new policy stance is one that is more restrictive. In short, the low-interest rate environment that we have enjoyed is ending, and the direction of interest rates will be higher. You should make note of this and consider what it means to your financial picture.
Why is the Fed Working to Influence Interest Rates Higher? Two basic reasons:
1. The pandemic is receding now, and our country is moving into a post-pandemic environment. This means that the health emergency is passing, and it is time for the Fed to move monetary policy back to a more normal range.
2. Inflation is running at its highest levels in 40 years, and, as a result, the Fed needs to react. They have an opportunity to mitigate the forces that are leading to inflation, and their actions are needed now. We expect these rate hikes to slow the economy down some, and this will help to reduce the cost pressures that exist.
What Could This Period of Rising Interest Rates Mean for You?
1. Borrowing costs will increase. With rates rising, the cost of some loans will be going up this year. Those people using credit cards, for example, should understand that they come with variable rates. This means you’ll pay more on your card balances over time. In general, lending institutions will likely need to adjust their rates for new loans after the Fed raises rates.
2. Good news for those with fixed-rate loans. If you currently have a fixed-rate loan, your payments won’t change. For example, most outstanding residential mortgages have a fixed rate, and those borrowers will make the same payment as always.
3. Consider your investments and savings accounts. With interest rates rising, available bonds will be paying higher interest rates to investors too. This suggests some opportunities for investors. Secondly, savings accounts and other cash accounts will see a rise in the rates paid for your money. Again, this will be a benefit. In general, families that hold investments and savings should see their investment income go up in this new environment of rising rates.
In closing, everyone should be alert. This initial rate move by the Federal Reserve could be viewed as a signal that the environment is changing. Focus on your financial arrangements and take this opportunity to prepare yourself for the conditions ahead. By understanding your personal balance sheet condition—investment assets and loans—you should be better equipped to handle a rising rate environment.
Keith and our team of USB financial advisors bring worldly expertise and local knowledge and service to the table for every discussion. Call us today and set yourself, your business, and your employees up for success in 2022 and beyond – 866.872.1866 or visit unionsavings.com.
Disclaimer: This is a general communication being provided for informational purposes only. It is not designed to be a recommendation for any specific investment product, strategy, plan feature, or other purposes. By receiving this communication, you agree with the intended purpose described above. Union Savings Bank and its’ representatives are not suggesting that the recipient or any other person take a specific course of action or any action at all. Prior to making any investment or financial decisions, an investor should seek individualized advice from personal financial, legal, tax, and other professionals that take into account all of the particular facts and circumstances of an investor’s own situation.
Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be appropriate for all investors.