Here’s a basic overview of how interest rates affect regular consumers:
• When the federal fund rate increases, money is more expensive to obtain, and people might notice things become more expensive and budgets become tighter.
• When it decreases, things are often cheaper, which leads to an influx of spending.
Based on historic data, it usually takes an entire year for consumers to notice changes in the economy due to interest rate increases. Investors and borrowers tend to feel this change earlier. That is because the initial increase causes a trickle-down effect and banks will charge more for their customers to borrow funds, and that includes anyone who uses credit cards or has a loan or mortgage.
Increased interest rates mean less money in your bank account after bills are due, and people tend to spend less money on things they consider to be “luxuries,” which in turn impacts businesses.
This isn’t that unusual — and it’s not going to mean the end of the world for business in America. But, if enough companies experience this type of financial burden at the same time, it starts to effect the market. Thus stock, trades and other investments could potentially be negatively impacted by cautious and hesitant investors.
But it’s not all bad.
While there’s no guarantee about how the market will react to a change in the federal fund rate, consumers should be prepared and make smart, informed investment decisions.
That’s why everyone should look at their current financial situation and think about the future. Don’t let rising interest rates surprise you. Be prepared, and plan accordingly.
If you have any questions contact an Avantax Financial Advisor to discuss any concerns you may have and how this change may affect your portfolio.