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When the Fed lowers interest rates, it aims to increase borrowing and spending by businesses and consumers.
It also aims to generate more business activity and more hiring. When the central bank raises interest rates, it is generally an action to reduce inflation and “cool off” the economy.
The focus right now is on Inflation. In latter July, the government reported that the Consumer Price index (CPI) rose by .9% which shows signs of rapidly rising costs of living. When this becomes chronic the Federal Reserve usually raises interest rates to cool off the economy. The high unemployment rate is the only thing holding them back, which is being manipulated by the Federal government by offering federal subsidies to the state unemployment structure. The subsidy is forcing companies to pay more than fifteen dollars an hour which has been a Democratic goal for the last few years. The Fed has signaled that it does not plan to raise interest rates until sometime in 2021.
But when rates do increase it is important to know how that affects your portfolios. A rate hike reduces the amount of money in circulation, then the cost of borrowing goes up. This affects the rate you pay on auto loans, credit cards and other forms of loans. Not only do higher rates affect what it costs consumers, it also has a profound impact on corporations. Higher interest rates mean it costs more for corporations to pay on interest rates. Those costs are generally passed on to the consumers which leads to more inflation and then higher interest rates. Costs go up until they cannot and that spells trouble.
Higher interest rates impact a company’s cash flow because they need to make higher interest payments. All of this slows the economy and slows down GDP. If you have long dated bonds in your portfolio or bond mutual funds, you need to call and make an appointment for us to analyze your asset allocation. (941 925-2121 Vimvest HDmoney). So what can we do for investors who are looking for both safety and income? There is a range of answers to this question, and we invite you to reach out to us if you’re curious to learn more about the full menu.
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