When the Federal Reserve raised the interest rate to 0.75% in December, they projected another three rate hikes over the next year. The first of those has just been enacted in their March meeting, and the rate is now 1%, returning it for the first time to the level it was at before the 2008 economic crash.
The move was not unexpected. Experts have been predicting it all year, and Fed Chair Janet Yellen made it clear in the weeks leading up to the meeting that a rate hike was likely. So what does this mean for the economy? More importantly, what does it mean for you personally?
Mortgages, Credit Cards, and Savings Accounts
When the Fed raises the interest rate, it means banks and credit unions need to pay more when they borrow from the Federal Reserve. Those higher rates are then passed on to their customers in the form of higher mortgage rates and credit card interest rates.
After the 2008 economic crash, the Fed lowered the interest rate to a range of 0-0.25%, effectively making it free for banks to borrow money. It remained there until 2015, and mortgages reached historic lows in response—eventually down to 3.36% for 30-year fixed-rate mortgages, and 2.69% for 15-year mortgages. Then, the interest rate was raised again, and mortgages have been creeping up as well, slowly but surely, currently averaging 4.1% and 3.25%, respectively.
Logic dictates that when interest rates go up, the rate paid on savings accounts will rise as well. Unfortunately, that doesn’t appear to be the case lately. The average interest rate on a money market account is around 0.11%, which is exactly the same as it was a year ago at this time—despite the fact that we had another rate hike in December.
Meanwhile, the average rate on a 1-year CD has increased by only 0.03% since a year ago, from 0.28% to 0.33%. So yes, the interest for your savings account could rise, but the difference will likely be negligible, while your mortgage and credit card rate will be more significant.
Effects on the Rest of the Economy
Ostensibly, the Federal Reserve only votes to raise interest rates when the economy is strong enough to bear it. That’s why they were kept so low for so long. By making it cheaper for the banks to borrow money, it allowed them to pass on those savings to their customers, thus giving the economy a chance to recover in the wake of the 2008 crisis.
Now, by putting our interest rate back at pre-crash levels, it’s clear the Fed believes we’ve fully recovered from its effects. But have we? It’s true that the Dow, NASDAQ, and S&P 500 have all set new records in recent months. Still, many experts have voiced concerns that these highs are only a bubble, which is due to burst at any moment. And the rise in interest rates at this precarious time is only making the situation worse.
So what happens when the Fed raises the interest rate when the economy isn’t strong enough? Well, we’ve already covered the rise in mortgages and credit card interest rates.
Having to pay more on these basic expenses means less disposable income for the average family. In response, they curtail their spending, and businesses suffer. The stock market goes down, and prices go up.
A rise in prices when disposable incomes are already low makes businesses suffer even more. The markets continue to decline, prices continue to rise, and it becomes a vicious circle. Eventually, as business continues to fall off, it forces layoffs, and the unemployment rate rises. The end result is that our economy is plunged into another recession.
This decline doesn’t happen overnight. It can take several years for the effects to be felt fully, which is what makes it so dangerous. Since at first, it looks on the surface like the economy is still functioning fine, it can cause the Fed to continue raising the interest rate further, thus hastening our decline. Eventually, though, the bubble will burst, and then it will be too late.
When the economy crashed in 2008, hardworking Americans lost an estimated $2 trillion in retirement savings. The money they’d worked for years to save up was gone in the blink of an eye. As a result, many had to keep working, either continuing in their existing jobs longer than they intended, or taking on part-time work, in order to support themselves without a 401(k).
When the current market bubble bursts, many people will be faced with the same problem again. That’s why it’s important to take steps to prepare yourself before it actually happens. In addition to your regular IRA/401(k), you need a safe haven, to guard against impending financial disaster.
Perhaps the best option in this regard is investing in a Gold IRA. As a physical asset, it retains its value over time. Not only that, it tends to go up when the stock market goes down. This provides you with a cushion in the event of a financial disaster. Your stocks may be depleted, but your gold investment goes up, preventing you from losing everything.
The Fed has projected two more interest rate hikes before the year is over, and the stock market bubble grows continually bigger. The writing is on the wall that we’re due for another financial disaster before long, and the illusion of prosperity will be shattered.
Protect yourself now, before the bubble bursts.
Trevor Gerszt is America's Gold IRA Expert, CEO of Goldco Precious Metals, and holds a position on the Los Angeles board of the Better Business Bureau.
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