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When small feels like a big deal

I just got my hair trimmed.

When my hairstylist says "trim," he always mentions "just an inch," while I claim that is a lot of hair and keep a close eye on him, while he turns me away from the mirror and hacks away, convincing me that I am on the receiving end of a buzz cut worthy of the Marines. Most of the time, however, when I hear the word "inch" I think of a very small measurement. It is similar to  .5%, which sounds like a tiny amount, and it usually is just that. However, when the Federal Reserve (Fed) raised interest rates by half a percentage point earlier this week (also known as 50 basis points), it was the sharpest rate hike in over two decades and it is significant. 

Why is the Fed raising rates?

In a word: inflation. The central bank is concerned that prices are climbing too rapidly as people keep on spending money. Demand has grown so much that it has outpaced supply, especially given that supply chains were already compromised due to covid and staffing shortages continue. Last week the Commerce Department announced that prices had surged 6.6% during the twelve months ending in March. That is more than three times the Fed's target rate for inflation and the sharpest increase in prices since 1982. The goal of the Fed is to lessen demand and lower inflation by making it pricier to borrow money. The higher the rate hike, the lower demand should go, or that is the predicted outcome. 

How will such a hike affect us, the consumer?

In several ways. For example, it will make it more expensive to get a loan for a car, and you will want to pay the balance off on your credit card if possible, as that is about to become pricier as well. The cost of buying a home will also increase, with mortgage rates at already above 5%, in anticipation of this move (pun slightly intended). This adds up to higher monthly payments for homeowners but can eventually lead to lower prices overall, especially on such necessities as housing, gas, and groceries.

The Fed does not want to raise prices

Of course, the Fed does not want to raise prices so much that the average American becomes afraid to spend so much as a penny. The objective is to lower inflation without sending us into another recession, so policymakers tend to move cautiously with hikes. While some experts are confident that this measure will work, others are concerned that we will see an economic downturn, prompting business owners to lay off workers. Only time will tell if this and other measures taken by the Fed work (they will gradually reduce the collection of government bonds and mortgage-backed securities that it bought during the pandemic), but one thing is for certain: this and other projected hikes will affect us all, so if you are nearing retirement, give us a call and make an appointment to come in, so we can help you strategize ways to keep the impact from rising prices at a minimum.

The market responding

The market responding as it has in the past couple of days is not surprising, as confidence drops, but there are steps you can take to help you hold on to your savings and as my soon-to-be economist son reassured me: There are always ways to make money, even in an economic downturn. Next week I will talk about one of those methods, and you can determine if it is may be right for you. If you do not want to wait until then, call us and we can talk about it sooner. Just as my hair was cut the tiniest of amounts and I walked out of the salon breathing a sigh of relief, we will do our best to ensure that your losses are either miniscule or better yet, non existent, so you too can breathe easily and sleep peacefully. If the economy is robbing you of sleep or giving you headaches, take a look at the attached articles that include tips on how to quickly and easily get your zs and how to rid yourself of pesky headaches naturally. If that does not work, glimpse at the adorable photos of penguins interacting with a robot named ECHO. It may not help you sleep but it is guaranteed to make you smile and that is worth a lot in itself. 

Have a nice weekend and happy Mother's Day to all the wonderful moms out there!

Warmly,

Kimberly Wolf and Your Team at Pacific Financial Advisors