The Federal Reserve (FOMC, Federal Open Market Committee) meets this week, and it seems as if the announcement has already been made, rates are going up .50%. (Fifty basis points)
This is great for CD and Annuity savers, not so great for borrowing. The purpose of raising rates is to “slow” the economy.
Why slow the economy?
To curb inflation.
When there is too much money trying to buy too few goods and services. And prices go up…A LOT.
Some economists believe when government increases spending (like giving us money and buying bonds to encourage America growth) this causes businesses to pause and not invest. (Meaning businesses won’t spend, expand, hire). When businesses don’t spend, this can cause economic growth to decrease.
In effort to slow spending when there is not enough goods and services, the Fed raising rates will make it harder to borrow money (Higher rates discourage spending. Lowering rates encourage spending).
When economic growth slows, and if it slows too much…well this can also be bad. We don’t want it to slow spending too much where people STOP spending money. Hence the phrase, “Soft Landing”
Less spending should give goods and services time to rebuild.
A Soft Landing is when the Fed try and slow the economy s l o w l y. If it’s too fast, it could cause a recession. In other words, if the Fed raise rates too fast and spending STOPS, this could start a recession.
Okay, what is a recession?
This is when the GDP (Gross Domestic Product) decreases. In an attempt to explain GDP, it’s like adding up all money spent by businesses, consumers and the government in a quarter. (There are so many influences and other ingredients).
So, the Fed needs to raise rates.
It’s a balancing act. The Fed needs to raise rates in the perfect time and amount, so they have a soft landing. A soft-landing means inflation is lowered, and spending is still happening. No recession please!
Abe Tubbs, owner of Ohnward Bancshares, and past director of Chicago Federal Reserve Board shared, “We expect the Federal Reserve will raise the federal funds target rate by 50 basis points to 1.00% this week, and potentially make a similar move next month at their June meeting.”
Brigham Tubbs, owner of Ohnward Bancshares contributed, “With recessionary pressure on the horizon, the Fed is in a tight spot. The current low rates do not provide enough room to cut rates.”
(Ohnward Bancshares Inc, is a holding company owning three community bank charters in Eastern Iowa. Owned by two families, Abram and Brigham Tubbs represent ownership)
Raising rates is also called “Tightening.”
The stock and bond market react to all of this. Usually bond markets don’t perform well when rates rise.
Stock markets are volatile when the feds tighten and stops buying bonds.
So, what’s the future?
Hopefully a soft landing.
Keep up the monthly habits’ investors.
You are building wealth when adding to your accounts during volatile markets.
Kerry Schepers, ChFC
Ohnward Wealth and Retirement