All the economic news is currently about what \u201cthe Fed\u201d will or won\u2019t do next. Raise rates, lower rates, or take a pause. But what does that mean exactly and how does it relate to your investments? \u00a0Let\u2019s break it down.<\/p>\n
\u201cThe Fed\u201d is the Federal Reserve Bank of The United States of America. One of its three branches is the Federal Open Market Committee, or FOMC. These guys are responsible for making decisions about setting the federal funds rate. The federal funds rate, otherwise known as the \u201covernight rate\u201d is what banks loan one another to settle differences between deposits and withdrawals at the end of the day.<\/p>\n
It has no direct impact on your mortgage or savings rate, but it does have an influence on short-term borrowing and lending in the U.S. And it\u2019s influence spills over to us in Canada.<\/p>\n
So, although the Fed doesn\u2019t have a direct impact on you, it does have an indirect impact.<\/p>\n
Currently, you can\u2019t take in any financial media without hearing a lot of pontification about what the Fed will do at their next meeting on May 3. That\u2019s because they don\u2019t know, with purpose. The Fed is legally obliged to keep their decision quiet until the next scheduled announcement date.<\/p>\n
The Fed has been raising rates (overnight rates) for the past 18 months with the intent to reduce inflation. They have done that successfully and to date the rate of inflation has dropped from a high of 9%+ to the current 5%. While inflation is still higher than what any of us would like, lower is still lower and it takes a while for the impact of the Fed\u2019s decision to take affect.<\/p>\n
Watch and wait to see if the Fed is done with raises. Meaning they might take a pause from further rate increases, according to Bloomberg:<\/p>\n
\u201cIn post-pause data going back to the early 80\u2019s the S&P 500 Index has posted an average return of 6.9% after three months, 18.9% after a year and 34.7% after two years\u201d.<\/p>\n