Though Powell is no rock-star economist, he has a strong business background and comes from years working in corporate America. Trump is presiding over a projected 60-year low unemployment rate, a strong economic growth rate, and a record high stock market. After protracted and public feuds with Yellen, Trump decided against extending her term as chair, but replaced her with a man who shares her economic outlook and has backed her monetary policies.
Today, we’re going to assess the implications of this decision—not only on the economy in general, but also on how it’ll affect your wallet.
Wait, what exactly is the Fed?
Established in 1913, the Fed’s raison d’être (reason for being) is to maximize employment, stabilize prices, and moderate long-term interest rates. Throughout the years, it has played an increasingly active role in stabilizing the financial sector through regulation and manipulation of the money supply.
The Fed is perhaps the most important non-elected governing body in the United States, so any change in its policies can have radical effects on the economy. While the Fed exclusively deals with macroeconomic concerns, its decisions do trickle down.
Let’s see what the Fed’s policies might mean for the economy, and what you can do to stay ahead.
If you’re among the 38 percent of U.S. households with credit card debt, you can generally count on any move by the Fed affecting the interest you pay on it. Credit cards will be one of the first instruments of debt negatively affected by a hike in interest rates.
If you have a high balance on your credit card, it would be best to deal with it now. Take advantage 0 percent APR balance transfer credit card offers. These offers could help pay off stubborn debt once and for all.
Following the anticipated hike in interest rates, loans with a variable interest rate, such as personal loans and home equity lines of credit, could see rising borrowing costs. Refinancing these loans now can help you save on interest.
Are you a student or recent graduate? There’s no need for you to worry. Today, almost all student loans have a fixed rate and aren’t subject to changes in interest rates.
Increases in the interest rate can result in a strengthening of the U.S. dollar. The dollar could also appreciate due to increases in average wages and overall consumption. If you have foreign currency now might be a good time to switch it over.
Saving accounts and Certificate of Deposits (CDs)
The Fed’s goal of reaching a 2 percent long-term interest rate will inevitably affect the interest you receive on checking and saving accounts.
Theoretically, a Fed interest rate hike will bump up the interest you would get in a savings account. However, this process could take up to 12 months. Slowly, but surely, being a saver is paying off again.
If you’re risk averse, keeping your money in a savings account will become a more attractive option. CDs might not be the best investment now, with their fixed interest rates. Shop around online before committing your investment to maximize interest earned.
Stocks and bonds
In a period of rising interest rates, bonds will likely suffer. But remember that in the unlikely event of an economic downturn, bonds have historically been much less volatile than stocks.
Stocks will generally benefit from rising rates as a confident Fed suggests a stronger economy. Investors should understand that no matter if interest rates rise, investing in a diversified portfolio made up of quality stocks and bonds is the proven method for successfully riding out the market roller coaster.
While Powell is the new face in arguably one of the most powerful positions in the United States, he will likely continue down the same path as his predecessor.
It’s important to recognize that the next few years will be different than the past. A keen and nuanced understanding of the Fed’s policies is critical to planning for the future and protecting yourself and your wallet.
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