The increase in the fed funds rate this month and its potential impact on your portfolio
Cleveland, OH, March 31, 2022 (GLOBE NEWSWIRE) — Historically, March has been a financially volatile month – one of the most recent examples of this is the hit the United States economy took in March 2020, when the COVID-19 pandemic first hit. It is also the month when the Great Recession of 2008 reached its peak.
With so much at stake right now – the war in Ukraine, the tensions with China, the midterm elections in the United States, for example – this March is no exception. On the 16th, the Federal Reserve raised the federal funds rate by 0.25%.
For those unfamiliar, the federal funds rate is the rate at which commercial bankers borrow and lend their excess reserves overnight. When the Federal Reserve changes this rate, the objective is economic growth, but these changes can have a domino effect on other parts of the economy. For example, the federal funds rate influences the prime interest rate, which is the benchmark for things like credit card rates, auto loans, and home equity lines of credit.
Less than half an hour after the official announcement of the increase in the federal funds rate, the stock market fell about 1.5%, but then rebounded more than 6% when the Chairman of the Board of the Federal Reserve, Jerome Powell, announced that in his opinion, the current economic growth conditions could manage the increase in rates: “The economy is very strong, and in the context of an extremely tight labor market and of high inflation, the Committee anticipates that continued increases in the target range of the federal funds rate will be appropriate…. Although the invasion of Ukraine and related events pose a downside risk to the outlook for economic activity, FOMC participants continue to expect solid growth.
James Makee, executive vice-president and partner at Oxford Harriman & Company, notes: “There are many factors moving stocks, but we have cited Fed policy as an important driver. We also don’t entirely agree with the positive outlook presented by Chairman Powell and still anticipate market volatility.
In the past, after the Federal Reserve raised the interest rate, there was a greater impact on yields on longer-maturity Treasury bills (10-year and 30-year) than on longer-maturity yields. short ; in general, longer-term bonds are more sensitive to changes in interest rates. In short, it’s because rising interest rates cause bond prices to fall. In turn, rising bond prices lead to lower interest rates.
As interest rates change, you should keep an eye on your stock portfolio and personal finances. Stocks and bonds can experience negative returns, which means your investments have lost value. Additionally, interest charges can increase on all forms of debt, such as credit cards and home equity loans.
So why has the Federal Reserve chosen to raise interest rates, when it can impact so many aspects of the economy? James Makee explains: “The Fed is raising interest rates in an attempt to reduce inflationary pressures.” Inflationary pressures are the things that cause inflation – for example, an increase in production to meet demand or an increase in prices due to a lack of supply.
Makee continues: “In February, inflation in the United States reached its highest level in 40 years, at 7.9%”.
President Powell said the Federal Reserve Board “expects inflation to return to 2% as the labor market remains strong. That said, inflation is likely to take longer to return to our price stability target than expected. The Fed’s projections estimate that inflation will decline to 2.3% by 2024.
According to James Makee, “The risk remains that the Fed has misjudged the strength of the economy. Future rate hikes can dampen economic growth and trigger a recession. »
If the past few years have taught us anything, it is that unexpected and unprecedented events can occur at any time and have a major impact on the economy and the markets. Making positive projections for the state of the economy during a period of global economic turbulence seems like a risky move.
Regardless of what happens next, there are always strategies you can use to help prepare your investments and assets. Paying close attention and seeking the advice of financial experts can help you stay prepared for just about any economic scenario.
CONTACT: Oxford Harriman & Company 3201 Enterprise Parkway, Suite 400 Beachwood, OH 44122 216-755-7150