Hey Reader

Last Wednesday the Federal Reserve raised its benchmark interest rate by 0.25 percentage points, pushing it to a range of 3.75 to 4 percent. The Fed is raising rates to reduce demand and bring inflation down. The trade-off is that reducing demand can also slow economic growth. That rate influences borrowing throughout the economy, although it does not directly set every consumer rate.

Here is what that means for your money.

Let’s start with the upside. If you have cash sitting in a savings account or CD you may start seeing better returns. Higher rates tend to benefit savers and newly issued bonds also become more attractive. And if markets take a dip as a result of this decision, that can create better entry points for long-term investors.

On the flip side, credit cards, variable-rate debt, and any new loans you take out may get more expensive. The Fed does not directly set mortgage rates, but its decisions influence the broader rate environment. Higher rates also make it more expensive for businesses to borrow and expand. If companies pull back, that can eventually mean less hiring and more pressure on jobs.

And then there is the part nobody wants to talk about. Rate hikes do not hit everyone equally. Households carrying significant debt or living paycheck to paycheck feel this much harder than cash-rich households which can actually benefit from higher yields. And bringing inflation down may require weaker hiring or higher unemployment before it is over. The people who can least afford it tend to absorb most of the pain, an unfortunate theme in our society.

So, what steps should you take?

If you are carrying high interest variable rate debt, get rid of it or reduce it as much as possible because the cost of that debt just went up. If you are planning a major purchase like buying a car or a home and need to borrow money make sure it works at today’s rate. Do not buy thinking that rates will fall soon and get stuck with a payment you can’t afford. Also check whether your savings account is giving you a competitive rate right now. Many banks are slow to pass rate increases on to customers. Shop around if yours is not keeping up.

If you’re an investor don’t stop. Keep investing according to your time horizon. One Fed meeting does not change the long-term case for owning good companies. If anything, a dip gives you an opportunity to get in at a better price.

For my Canadian readers, you’re mostly unaffected by this as the Fed does not set Canadian rates, but its decisions still affect U.S. investments, currencies, and borrowing conditions globally. Worth keeping an eye on.

— Stock Savvy Dad
​Invest smarter, build wealth, be a savvy dad.