You, Your Financial Well-Being and the Federal Reserve
You, Your Financial Well-Being and the Federal Reserve
Beginning in December 2016, the U.S. Federal Reserve (the Fed) had been gradually ratcheting up the federal funds rate, until it reached its December 2018 level of 2.25–2.50%. Effective August 1, 2019, that changed: The Fed lowered the federal funds rate by a quarter point, to 2.20–2.25%. Even though the announcement was not a huge surprise, it was the first rate decrease since the thick of the 2008 Economic Crisis. As such, the move is receiving wide media coverage accompanied by the usual outpour of opinions on whether it will help or hurt us.
What does the rate change mean to your financial well-being? Is there anything you should “do” to your investment portfolio in response? We typically recommend you remain informed – but you act only on factors you can expect to manage within your personal investing. This is nearly always the case for economic events and other breaking news over which we have no control.
In that context, let’s take a moment to talk about the Federal Reserve funds rate.
What Is the Federal Reserve?
As described on its consumer education site, the Federal Reserve is the central bank of the U.S. It was created by Congress as an independent government agency in 1913 “to provide the nation with a safer, more flexible, and more stable monetary and financial system.”
Jerome Powell is its current board of governors’ chair. He and his board are tasked with three main roles:
- Monetary Policy – Promoting “maximum employment, stable prices and moderate long-term interest rates”
- Supervision and Regulation – Overseeing U.S. banks and gathering information to understand financial industry trends
- Financial Services – Serving as a bank for U.S. banks as well as for the country’s monetary operations – issuing currency, managing the government’s bank accounts, borrowing money in the form of U.S. Savings bonds and more
What Should You Do?
Whenever you’re wondering how best to respond to a shifting landscape such as that wrought by falling (or rising) interest rates, begin by asking yourself: What can I do about it?
Unless you are Fed chair Jerome Powell, there is probably nothing you can do to personally influence what the Fed’s decisions will be, or how the global markets are going to respond to them. But there is plenty you can do to help or harm your own wealth interests.
First, if you already have a solid financial plan in place, we do not recommend abandoning it in reaction to unfolding news. If, on the other hand, you do not yet have a well-built plan and portfolio to guide the way, it’s a good time to develop that. Personalized financial planning is a good idea in all environments.
Next, recognize that rising or falling interest rates can impact many facets of your wealth: saving, investing, spending and debt. Having a conversation with a financial advisor is one way you can position yourself to make the most of multi-factored influences in unfolding economic news.
Together and through varied interest rate climates, we can help put these and many other worldwide events into the context they deserve, so you can make informed judgments about what they mean to your own interests. The goal is to establish practical ways to manage your debt; wise ways to save and invest; and sensible ways to spend, before and in retirement.
These are the factors that matter the most in your life, and over which you can exercise the most control – for better or for worse. Don’t hesitate to give us a call if we can help make things better for you.
