This article is from the Investing Articles: Stocks and Options series.
To no one's surprise the Federal Reserve Board (the Fed) hiked interest rates again this week in an effort to cool off the economy.
The last three rate hikes haven't had much effect, but maybe fourth time is charm. The three rate hikes in 1999 were met with increased employment and a stock market that laughed at the increases.
If rising interest rates aren't slowing the economy down, why should you care whether they go up or down?
As a consumer, you will see interest increases in home equity loans, credit cards, auto loans, and other consumer debt. As long as your income keeps going up, the additional interest will probably not change much in your life.
The Fed plays a delicate balancing game between keeping inflation under control and not pushing the economy into a recession.
Their control of key interest rates sets in motion increases or decreases in most interest rates you pay. The danger begins when wages stop increasing as fast or faster than interest rates.
You can read several good article about interest rates at bankrate.com an excellent resource for banking and credit information.
So, beginning investors, what do rising interest rates mean to you?
As a long-term investor, you really don't care that much, unless you are nearing the end of long term investing and can see retirement in the near future.
If the Fed keeps raising rates and is successful in slowing things down, you don't want to take a chance that the market's brakes will lock and your growth investments will go through the windshield.
It is always wise to consider moving out of aggressive growth investments that can be interest rate sensitive and into more balanced and conservative investments when you need to be more concerned with preventing big losses than scoring big gains.
Try to keep your high interest debt under control. Rising interest rates will only make things worse. Re-double your efforts to get that debt paid off. It may be time to consider converting any variable rate mortgages to fixed rate mortgages if you can.
There are no definite signs that inflation is on its way back, but the Fed is troubled by what it sees. Look for more interest rate hikes in the future and be prepared for higher interest rates on your debt.