What is the Fed, and why do so many people pay so much attention to it?
More importantly, does it impact your financial life?
In short: yes.
It sounds complicated, but knowing the basics can go a long way.
What Is the Fed, Anyway?
The Federal Reserve(also known simply as “The Fed”) is not a government agency.
In general, when the Fed lowers interest rates, the goal is to stimulate the economy.
Conversely, they usually raise rates when they want to slow down the economy.
That state of union release always makes the financial headlines.
At the end of 2014, the unemployment rate was 5.7%: not low enough, but dropping.
GDP growth ended 2014 around 2%, on the low side of acceptable.
First: the days of earning nothing on your savings account will gradually fade.
Unfortunately, loans and other kinds of debt will cost you more once interest rates go up.
So get rid of as much debt as you could.
If you have a variable interest mortgage, now is the time to switch to a fixed interest rate.
When interest rates rise, the market value of bonds, and bond funds, will drop.
Therefore, when you rebalance and sell some of your bond funds, expect a loss.
On a grander scale, rate hikes often lead to bad things in the economy.
It can start with a major stock market drop, which then pushes the economy into full-scale recession.
(This is why so many people are fixated on what the Fed is doing these days.)
That means if you own a business, this is the wrong time to expand.
Fixed overhead and debt are the two biggest business killers in a recession.
Starting a new business now is, more likely than not, a bad idea for the same reason.
If you’re prepared, a recession is not a bad thing.
As someone once said: winter isn’t so bad if you’re in the Bahamas.
The key is being prepared.
Forewarned is forearmed, and if you follow what the Fed says you will always be forewarned.
