Fed’s Interest Rate Hikes May Feel Like the End of an Era

Number of the Day: The most relevant or interesting figure in personal finance

8.75

That’s how many of the last 13 years the Federal Reserve’s benchmark interest rate has been virtually zero (the Fed cut the rate that low for the first time in 2008), showing just how different borrowing will become this year as the central bank begins raising it.

Minutes from the Fed’s last policy meeting, released Wednesday, showed that officials are willing to increase the benchmark sooner than planned to fight inflation, signaling to some analysts the first rate hike may come as early as March. In fact, one tool showed the vast majority of traders were betting on a Fed rate hike in March. While officials had previously indicated three rate increases were planned this year, many economists had expected them to start a little later in the year.

The target for the benchmark fed funds rate, which influences interest rates for a wide range of loans like home mortgages and credit cards, had been slashed to between 0% and 0.25% to encourage borrowing when the pandemic hit last year. A higher rate is meant to cool demand and tamp down inflation in an overheated economy. 

A rising interest-rate environment might also shock the stock market, since stocks have benefited from the fact that other places people could put their money, like savings accounts, provided virtually no return on investment. 

"This is the end of an era, one of the most generous eras ever experienced by U.S. equities, Mike O’Rourke, chief market strategist at JonesTrading, said in a commentary. “For years, markets have placed exorbitant multiples on growth stocks because there was no alternative.” 

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Article Sources

  1. Federal Reserve Bank of St. Louis. “How Does the Federal Funds Rate Affect Consumers?

  2. Federal Reserve Bank of Cleveland. “Why Does the Fed Care About Inflation?

  3. Congressional Research Service. “Federal Reserve: Recent Actions in Response to COVID-19, updated March 31, 2020.”