Janet Yellen and the rest of the Federal Reserve raised their Federal Fund Rate (or “Fed rate“) once again. For the first time this year and the third time since the 2007-2008 financial crisis, the Fed rate is up by another .25%, bringing the rate between .75% and 1%. This increase comes after the Fed suggested they will periodically increase their rates by a quarter of a percent during 2017.
Yellen and the rest of the Federal Reserve System’s Board of Governors spoke earlier this year about the healthy direction that the economy is taking. The 238,000 more jobs added in February certainly helped their decision, as did the lowered unemployment rate. The Federal Reserve believes that the economy is progressing the way it should be ten or so years after the market crash. The average worker’s pay is slowly and steadily going up. Consumers are more upbeat about the economy, despite the change in political climate and increased discussions about automation.
Increasing the Fed rate normally has a positive impact on American banks and a slightly negative impact on the stock market. This could have major consequences for your investments and the economy over time. But how did the market react to this latest increase, and how does it affect you? Let’s take a look.
The Federal Fund Rate was lowered after the 2007-2008 crash to reinvigorate the economy.
America is no longer in stuck in a recession. In fact, the stock market made steady increases in the last eight years, with indexes like the Dow and S&P 500 hitting record highs this year. There are less people without jobs (though unemployment is still sizable), and the existing jobs pay a bit better. People are spending more money, which helps the company and businesses alike.
Since the economy is doing relatively fine, the Fed doesn’t need to keep their rate at a low level anymore.
The Fed rate determines just how much it costs for major banks to borrow from one another. This also determines just how much interest savings and money market accounts can accrue over a year. When people can earn more from their banks, they’re not as incentivized to invest as much on the stock market. This is because interest-driven bank accounts let users earn money risk-free, while stocks require taking some sort of risk. (Be sure to read our guide on the Fed rate to learn more about how it works.)
The Fed expects the rate to increase by another 1.9% in less than two years.
Increasing the rate to 2.9% will effectively end any artificial growth that was introduced to get the economy back on track. This will also increase inflation, something many consumers fear but the Fed welcomes.
The stock market is surprisingly relaxed about the increase of the Fed rate.
As the Fed rate increases, people have more of an incentive to keep their money in the bank instead of the stock market due to increased interest. While this would normally make investors scared about the market’s future, the current stock market is still breaking records and considered by many to be “unstoppable.” While the previous Fed rate hike caused the Dow and other indexes to go down, those indexes are still going up even though the fed rate went up.
Investors believe that people will still invest in the market regardless of today’s rate increases. After all, the market is still thriving despite previous fears of a Trump presidency, the price of oil slowly decreasing, and other factors that could negatively impact investor sentiment or activity. While the Fed rate is up and interest rates will follow, the market will continue breaking records…for now.