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Fed interest rates: its influence on the financial landscape!

Written by The Anand Market

Updated on:

Are you aware of the Fed’s interest rate swings? Recently, policymakers announced that they would keep the interest rate at a level 5.25%-5.50. Can you guess what impact this would have on your financial life, as it is the melody that resonates behind the country’s economy?

Fed interest rate

Central bank policies have a direct impact on our financial lives as they aim to ensure a balance between economic growth and price stability. The federal funds rate, like the federal discount rate, regulates the supply of funds, inflation, and interest rates by raising borrowing costs, lowering them, and vice versa.

Its rate of rise and fall can have a direct impact on the interest you pay on your loans, the availability of jobs and the performance of your instrument. Let’s understand it through the data on current and past interest rates in the table below:

Date Target range Change from previous Economic context
Present (January 28, 2024)5.25%-5.5%+0.25% (July 26, 2023)Highest level in 22 years, aimed at curbing inflation (currently around 4.5%).
6 months ago (July 28, 2023)5.00% – 5.25%+0.25% (June 15, 2023)Signaled continued tightening of monetary policy to combat rising inflation.
3 months ago (April 27, 2023)4.75% – 5.00%+0.50% (March 22, 2023)First rate hike since December 2018, triggered by concerns about inflation.
1 year ago (January 27, 2023)4.25% – 4.50%+0.25% (December 14, 2022)Marked acceleration in policy tightening in response to persistent inflation above the Fed’s 2% target.
2 years ago (January 26, 2022)0.00% – 0.25%-0.125% (March 17, 2020)Emergency rate reductions implemented due to the COVID-19 pandemic.
5 years ago (January 26, 2019)2.25% – 2.50%+0.25% (December 19, 2018)Gradual increase in rates as the economy strengthened after the 2008 financial crisis.
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The target range indicates the upper and lower limits that should remain within the fund’s rate limits. The higher number means the tightest monetary policy and the lower number indicates the loose monetary policy. The change from the previous one shows the immediate rise and fall of the target range after each FOMC (Federal Open Market Committee) meeting.

If you look at the current target range, we can see that it reflects the Fed’s aggressive action to combat inflation. They tightened monetary policy to ease price pressure, leading to a slowdown in economic activity.

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Fed Interest Rates and Impact on Your Portfolio

The recent rate hike is the highest in two decades, which may have mixed consequences for your portfolio. Let’s explore the negative and positive impacts:

  • Borrowing: Current Fed interest rates may increase borrowing costs. Car loans, mortgages, credit cards, debts, etc. can become expensive as interest rates rise. This can impact financial decisions.
  • Businesses: As noted earlier, this can reduce economic growth, and borrowing for businesses can also become expensive, leading to reduced investment. This could also lead to a reduction in job creation.
  • Savings: If you are a saver, you can take advantage of higher interest rates on savings accounts. However, this increase may not fully offset inflation.
  • Stock market: Higher rates can benefit in the long run, leading to lower inflation. This will ultimately benefit the stock market. However, market volatility can be underestimated due to short-term adjustments. Additionally, we also have other assets that can impact market volatility.
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fed interest rate

What can you expect?

Fed Chairman Jerome Paul said at a recent press conference that the Fed could cut interest rates, but this was not disclosed.

Bank of America economists recently said that if our forecast of a March rate cut turns out to be correct, it’s likely because most participants are paying more attention to headline inflation statistics than to their individual components.

We can wait and expect the announcement at the next FOMC meeting (January 30-31, 24). However, it is possible that there will be no changes at the January meeting. Many economic sites predict that we can expect a decline in March.

The Fed kept its rate between 5.25% and 5.50% at the December 13 FOMC meeting, which was a relief for the banking sector and the stock market. And since the Fed announced a 3% drop in inflation, we can expect good changes in 2024. So, buckle up and keep an eye on current economic twists and turns to make informed decisions about your life financial.

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