What the Fed continues to do will set the tone (and level of pain) for months to come.
Economists have warned about inflation, we’ve seen prices rise of the past few months, and are all in its throes at this point. Inflation has hit the domestic US like a hammer, and while there are many possible explanations, much of that is driving inflation is more nuanced than what might be discussed more broadly. Inflation has become a global problem. Now that inflation is here to stay into the foreseeable future, how can we better understand what it is, and how to deal with it?
Simply put, inflation is when prices of things go up. A benchmark rate is like a goal that the Riksbank (the Swedish version of our Federal Reserve) wants to hit. Right now, the goal is 1.75%. The central bank enacted its 2% inflation target in 1993, which means they’ve been trying to keep prices from going up too fast for 27 years. Recently, Sweden had to start using negative rates (which means people get paid to borrow money) because everything was getting too expensive too fast. Now the Riksbank has raised its benchmark rate back up to 1.75%, which should help slow things down a bit again.
The ECB is raising interest rates, and the Swiss National Bank is expected to do the same. This comes after a period of negative interest rates, which some economists believe was not effective in stimulating the economy.
There is a possibility of the Bank of England increasing the policy rate by 50 basis points at Thursday’s conclave, in light of August’s 9.9% rate of measured inflation and a faltering currency. However, some economists believe that a more drastic measure is necessary and are calling for a 75-basis point increase. Meanwhile, the Federal Open Market Committee is expected to increase the funds rate by 75 basis points tomorrow. This rapid tightening cycle has caused some concern as to how long it will persist, with the effective funds rate primed to vault above 3% from 0.08% just six months ago.
The Wall Street Journal, Nick Timiraos wrote about how Fed officials are considering raising interest rates in order to force unemployment higher and slow wage growth. This would be the opposite of their strategy from the end of last year. The Federal Reserve Bank of Atlanta’s wage growth tracker showed a 6.7% increase on the three-month moving average to August 31st. That is a 4.5% increase since December and an increase 3.8% prior to the January 2020. This indicates that wages are growing at a faster rate than they were before the pandemic hit, thanks to the stimulus measures put in place by the Fed.
So, what does this news have to do with me, you ask?
The effect of a slowing economy on markets is that it can lead to decreased demand for goods and services, which can lead to layoffs and an increase in unemployment. Additionally, a slowing economy can lead to a decrease in consumer and business confidence, which can lead to decreased spending and investment. Finally, a slowing economy can lead to an increase in borrowing costs as lenders become more risk averse. This is because all of these “things” or factors are interrelated.
Interest rates are often thought of as one of the most important factors. This is because interest rates can have a direct impact on inflation, unemployment, and even economic growth. Inflation is the rate at which prices for goods and services rise. When inflation is high, it can erode the purchasing power of consumers, leading to a decrease in spending. This can then lead to a decrease in economic growth. Unemployment is the number of people who are looking for work but cannot find a job. When interest rates are low, it can incentivize businesses to invest and expand, which can lead to more jobs. Economic growth is the rate at which the economy expands. When interest rates are low, it can encourage investment and spending, which can lead to economic growth. The economy is slowed when interest rates rise; however, it is not always wise to lower interest rates.
Monetary policy is the process by which the monetary authority of a country, typically the central bank or currency board, controls either the cost of very short-term borrowing or the quantity of money in circulation, often targeting inflation or the interest rate to ensure price stability and general trust in the currency.
What are the main street effects of higher interest rates?
Well, a slowing economy affects retirement saving negatively. As disposable income decreases, saving for retirement becomes a lower priority for many people.
Some things you can do during a high interest rate environment are to maintain regular contact with your lender, stay on top of your payments, make extra payments when possible, and avoid opening new lines of credit.
But you should also be saving money in other places. A good rule of thumb is to have three to six months of living expenses in savings. This will help you cover unexpected expenses, like a job loss or medical emergency. You can also use this money to take advantage of opportunities, like a great deal on a vacation home. Once you have your emergency fund in place, you can start saving for retirement.
There are a few different ways to do this. You can open a traditional IRA or Roth IRA. You can also save in a 401(k) if your employer offers one. If you’re self-employed, you can open a SEP IRA. The best retirement account for you will depend on your situation. You can also save for retirement outside of a retirement account. You can open a savings account and earmark it for retirement. You can also invest in stocks, bonds, ETF’s and mutual funds.
The key is to start saving early and often. The sooner you start, the more time your money has to grow.
If you are worried about how a high interest rate environment may affect your finances, it is a good idea to speak with a financial advisor. A financial advisor can help you create a budget and develop a plan to pay down debt. Once you pay down debt and have an emergency fund in place, you can (and should) start saving for retirement.
Disclaimer: All Content on this site is information of a general nature and does not address the circumstances of any particular individual or entity. Nothing in the Site constitutes professional and/or financial advice, nor does any information on the Site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto.
