Oh my. I’m hoping everyone listening stayed invested over the last few months. The market had its biggest week in a year, or longer for some indices. The S&P 500 was up over 6% last week, is positive for the month and for the last six months. We’re still down year to date, but ahead of where we were in September of last year.
The market fundamentals, with the exception of inflation and geopolitical risk, are all positive. Jobless claims are down. This week the Federal Reserve Bank raised the federal funds interest rate by 0.25%.
And that means, what, exactly? The federal funds rate is the interest rate that banks – or the Federal Reserve – charge each other to lend funds over night. Each bank is required to keep a certain amount in reserve, or, on hand. If a bank has excess, they will lend it out overnight to earn interest. If they don’t have enough, they borrow from another bank.
This interest rate impacts the prime rate, which is the rate individual banks use as a starting point to lend money. Sub-prime borrowers pay higher interest rates, while those with high credit and collateral may receive loans for less than the prime rate.
This impacts you in a variety of ways. If you are going to borrow money, for a mortgage or car loan, or for a business, your rates will mostly likely be increasing as a result of the Fed’s increase in the fed funds rate. If you have credit card debt, or an adjustable rate loan, like a Home-Equity Line of Credit, those rates will be going up. If you are a saver, don’t expect your deposits to earn more interest overnight. There is usually more of a lag between rising rates and an increase in what savings accounts earn.
The Fed has raised rates as a way to tighten monetary policy, or reduce the amount of money available for the economy. When it costs more to borrow, people, and businesses, borrow less. Inflation is too much money chasing too few goods, and the Fed is trying to reduce inflation by attacking the money side of the inflation equation.
The biggest concern on the horizon is that, if the Fed raises rates too quickly, or if Congress doesn’t work with the Fed, we could have a recession. A recession is two consecutive quarters of negative economic growth. The Federal Reserve Bank needs a partner with the federal government, because increased federal spending only makes the “too much money” side of the equation worse.
Your action item to take this week is to look at your liabilities. Examine every debt you have – mortgage, car loan, credit cards. If you have higher rates, do you want to refinance while rates are low? If it’s a variable rate, do you want to lock in a fixed rate? And if you carry credit card debt, look at ways to reduce or restructure that.
You can always find more information on our Facebook page, or our website at covingtonalsina.com.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, contact the appropriate qualified professional prior to making a decision.