How the Fed and Interest Rates May Affect Your Investments
When the Federal Reserve Board Chairman talks the whole country listens and the markets react, and even overreact. With a new chairman taking over, there has been discussion about interest rates and inflation, yet many investors don’t really understand how the anticipated changes may affect their investments. There is usually no shortage of news reports when the Federal Reserve Board (Fed) meets – especially if they decide to adjust interest rates. If you’re wondering why the financial world watches the actions of the Fed and its chairman so closely, it’s because their decisions have an impact on the economy, the markets and even your investments.Congress established the Federal Reserve System, which functions as the national banking system, in 1913 to keep the U.S. economy steadily chugging along. The current Chairman of the Fed’s Board of Governors, Alan Greenspan, has been appointed chairman by three different presidents.Driving the economic machineThe Fed is charged with monitoring the supply of money to the economy. It sets economic policies by setting the interest rates that banks charge one another for loans. Any rate changes the Fed makes can result in our overall economy speeding up or slowing down and, by extension, interest rate changes also affect the stock and bond markets.If the Fed lowers banks’ rates, the effect may be lower interest rates on credit cards, auto loans and mortgages. Generally, that means consumers and businesses may spend and borrow more, helping to give the economy a boost. This can also be healthy for the stock market, since lower interest rates make it cheaper for businesses to borrow the money they need to grow and for consumers to finance mortgages and other purchases.Interest rates and inflation: what goes up …On the other hand, when the Fed raises interest rates, businesses and consumers borrow less and spend less, slowing economic growth. However, a positive aspect of higher interest rates is that you may earn more interest on your investments. Why raise rates and slow growth? Generally because the Fed is concerned that too much spending and growth could lead to higher inflation. Conversely, too little spending and growth could lead to a recession. As watchdog of the nation’s economy, the Fed meets every six weeks to review interest rates.So the next time you hear reports about the Fed, listen carefully. When the Fed changes interest rates, its not just news on Capitol Hill – it could have an effect from Wall Street to Main Street. Jeffrey Apps and Tracy Tutag offer securities and investment advisory services through AXA Advisors, 1290 Avenue of the Americas, New York, NY 212-314-4600, and offers annuity and insurance products through an insurance brokerage affiliate, AXA Network, LLC and its subsidiaries. They can be reached at 926-6911 or email@example.com.