Oxford Harriman & Company: This Month’s Increased Federal Funds Rate & Its Potential Impact on Your Portfolio
Cleveland, OH, March 31, 2022 (GLOBE NEWSWIRE) -- Historically, March is a financially volatile month– one of the most recent examples of this is the hit that the United States economy took during March 2020, when the COVID-19 pandemic first hit. It’s also the month that 2008’s Great Recession reached its peak.
With so much hanging in the balance right now– the war in Ukraine, tensions with China, mid-term elections in the United States, for example– this March is no exception. On the 16th, the Federal Reserve increased the federal funds rate 0.25%.
For those unfamiliar, the federal funds rate is the rate at which commercial bankers borrow and lend excess reserves overnight. When the Federal Reserve makes changes to this rate, the goal is economic growth, but these changes can have a domino effect on other parts of the economy. For instance, the federal funds rate influences the prime interest rate, which is the benchmark for things like credit card rates, auto loans, and home equity lines of credit.
Within half an hour of the official announcement of the federal funds rate increase, the stock market fell roughly 1.5%, but then rallied over 6% when Chair of the Federal Reserve Board Jerome Powell announced his opinion that current economic growth conditions would be able to handle the rate increase: “The economy is very strong, and against the backdrop of an extremely tight labor market and high inflation, the Committee anticipates that ongoing increases in the target range for the federal funds rate will be appropriate…. Although the invasion of Ukraine and related events represent a downside risk to the outlook for economic activity, FOMC participants continue to foresee solid growth.”
James Makee, Executive Vice President and Partner at Oxford Harriman & Company, notes: “There are many factors that move stocks, but we have cited Fed policy as being a significant driver. We’re also not completely in agreement with the positive outlook presented by Chairman Powell, and still anticipate volatility in the market.”
In the past, after the Federal Reserve has increased the interest rate, there has been a bigger impact on longer maturity Treasury yields (10-year and 30-year) than shorter maturity yields; in general, longer-term bonds are more sensitive to interest rate changes. In short, this is because rising interest rates cause falling bond prices. In turn, rising bond prices cause falling interest rates.
While interest rates are changing, you should keep an eye on your stock portfolio and personal finances. Stocks and bonds might experience negative returns, which means that your investments have depreciated in value. Plus, interest expenses might rise on all forms of debt, like credit cards and home equity loans.
So why has the Federal Reserve chosen to increase interest rates, when it can impact so many aspects of the economy? James Makee explains: “The Fed is raising interest rates in an attempt to reduce inflation pressures.” Inflation pressures are the things that cause inflation– for instance, an increase in production to meet demand, or an increase of prices due to lack of supply.
Makee continues: “In February, United States inflation reached its highest level in 40 years, at 7.9%.”
Chairman Powell stated that the Federal Reserve Board “expects inflation to return to 2 percent while the labor market remains strong. That said, inflation is likely to take longer to return to our price stability goal than previously expected.” The Fed’s projections estimate that inflation will decrease to 2.3% by 2024.
According to James Makee, “The risk remains that the Fed has misjudged the strength of the economy. Future rate increases can stall economic growth and trigger a recession.”
If the past few years have taught us anything, it’s that unexpected and unprecedented events can pop up at any time, majorly impacting the economy and the markets. Making positive projections for the state of the economy during a time of global economic turmoil seems like a risky move.
Regardless of what happens next, there are always strategies you can utilize to help prepare your investments and assets. Paying close attention and seeking the advice of financial experts can help you stay prepared for just about any economic scenario.
CONTACT: Oxford Harriman & Company 3201 Enterprise Parkway, Suite 400 Beachwood, OH 44122 216-755-7150