Updated: May 5, 2021
Interest rates can have a positive or a negative effect on the U.S. economy, the stock markets, and your investments. When The Fed changes the Federal Funds Rate (the rate at which banks can borrow money to lend to businesses or you), it creates a ripple effect.
The raising and lowering of the Fed Funds Rate is the role the Fed plays in stimulating or slowing down the economy. In theory, the lowering of interest rates should help boost the U.S. economy by encouraging borrowing and spending; consumers and businesses are more willing to make big purchases. Higher interest rates slow down borrowing and spending and restrict the flow of money into the economy.
Both of these scenarios reflect the performance of the stock market and your retirement assets. If you have fixed-income investments, the teeter-tottering of rates can impact negatively depending on the type of investment. In today’s economic environment, The Fed is lowering interest rates in an attempt to stimulate the economy enough to avoid another recession.
Lowering interest Rates - good or bad
Lowing interest rates are a sign of a weakening economy.
The Trade War continues to impact businesses with increased costs of imports for production or resale, and uncertainty over borrowing. Lowering interest rates may not be enough to stimulate the economy or corporate earnings, or to continue growing the share prices of the investments held in your retirement portfolio.
Historically when recessions end, there is a period of increasing interest rates, which, when left unchecked, can lead to loss of purchasing power for both consumers and businesses. It is this high-inflation scenario that The Fed hopes to avoid as they continue lowering interest rates.
What is impacted when interest rates increase?
· Home Mortgages with Variable Rates
· Savings Accounts and CDs
· Auto Loans
· Bond Prices fall, but income is generally higher
If you have questions about your fixed-income investments or retirement assets during this economic environment, click for a complementary financial consultation with Michael Romanello.
Additional Disclosure: This article is intended for educational purposes only and is not intended to serve as the basis of any purchasing decision.