Whenever the Federal Reserve raises or lowers interest rates, it can have ripple effects across financial markets and economies worldwide. That’s because changes in the Federal Funds rate affect everything from the cost of borrowing to the price of everyday goods.
For investors, it can take time for the impact of a rate hike to fully work its way through the economy and into stock prices. For investors, staying diversified and focused on your long-term goals can help you ride out short-term market gyrations.
The Fed’s rate increase is intended to cool the economy and tame inflation, which currently sits above its target of 2%. This is a tricky balancing act that can’t be achieved by just putting the brakes on consumer spending, which could bring the economy to a screeching halt.
If you’re a homeowner, the rise in rates may mean your monthly mortgage payments are higher, as will be the cost of any home equity lines of credit or auto loans. Credit card balances on variable rates are also likely to be more expensive as well. However, if you have the opportunity to refinance your debts now at a lower rate than you will see in the future, that could help offset some of the additional costs from the increased rates.
Rate hikes can also impact the global economy, particularly in emerging countries. As rates rise, investors may pull their capital from emerging markets, which can lead to a crisis. Academic research by Barry Eichengreen and Frank Rose has shown a correlation between the emergence of financial crises in emerging economies and a series of Fed rate hikes.
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