Rates are rising
Here we go again. The economy gets stronger and the Fed starts to raise rates, thereby increasing the cost of money. What should we know about this process and how do we protect our assets?
The rate that the Fed charges to commercial banks ( the discount rate) is starting to increase and correspondingly the rates for all your bank loans will increase. Also, mortgage rateswill increase: the price of success, we suppose.
We are told that the raising of the Fed rate is necessary in order to slow inflation. And that we have more inflation because the economy is expanding. Companies have expanded sales and therefore can now increase the cost of their products and services. The average consumer is caught experiencing higher prices for products and then the Fed rate goes up.
As the fed rate increases, the commercial banks will increase their interest rates to consumers for car loans, equity loans, and mortgage loans. All of this adds to the increased costs of products and borrowing for the consumer.
Are there offsetting benefits to consumers? Meaning are there areas that will increase wealth for the consumer and not just increase wealth for the banks? Yes, there are. Savings accounts and certificates of deposit at bankswill yield higher interest for the consumers at this time. Investment accounts for retirement investments will also increase in earnings as the rates increase. This means keep your retirement accounts invested so they can increase in value. Conservative investing will yield more wealth in times of Fed rate increases. This is the historic model that repeats itself.
Also, in times of inflation and Fed activity, real-estate values tend to increase. So, the average homeowner will have more value in his or her home. This also means that if you are considering purchasing a home, do it now, before rates and home prices increase.
The Federal Reserve is an independent organization outside of the control of Congress. For years it has worked its magic on our monetary supply and our interest rates. Watch carefully and consult with your advisors in order to increase your wealth. Protect your investments and beware of the increased costs involved in borrowing.
Jim Gay was a real-estate broker for 20 years and has been a financial consultant to Fortune 500 companies. He is currently a broker/owner of the Mortgage Place (505-986-9080) and can be reached at email@example.com.