Money Rehab with Nicole Lapin - What The Fed?

Episode Date: February 3, 2023

Nicole decodes the latest Fed meeting and what it means for your savings account.

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. It's time for some money rehab. On Wednesday, the Fed had yet another meeting on interest rates. After all, interest rates are the Fed's favorite tool to curb inflation.

And the Fed has been picking up that tool a lot recently. How much is a lot? Seven times. The Fed has raised interest rates seven times over the last year. That is a lot of times, guys, especially because we got used to interest rates being on the floor during the pandemic and rates became a bit out of sight, out of mind. But we know what happened next. Inflation got out of control and Jerome Powell, the Fed chair, had to step in and make some change. Literally. So starting in March 2022, the Fed started slowly hiking rates. And then in June 2022, the slow hike turned into a little bit of a sprint. In June, the Fed decided to raise rates

by 75 basis points, or 0.75%. And then in July, the Fed decided to raise interest rates another 75 basis points. And then in September, the Fed decided to raise interest rates, yes, yet another 75 basis points. I know less than 1% doesn't sound like a lot, but it certainly is a lot of cash when multiplied across the entire economy. Let's think about it another way. All those raises meant that interest rates went from 0.25% to over 4% in less than a year. That is a difference you can feel. For example, if you had $10,000 in credit card debt and were accruing interest at 0.25% a year, you would owe that $10,000 plus $25 in interest after year one. But if that interest rate got raised to 4% in year two, you would owe that $10,000 plus

$400 in interest. So yeah, those little points make a big difference. And just like we'd be sensitive to interest rates on our debt, the stock market is very sensitive to interest rates. Typically, an increase in interest rates leaves the stock market hurting. We've seen this especially with tech stocks because tech companies have loved how low interest rates have been. Those low interest rates made it super easy for them to borrow money to invest in all of their innovation fugazi. But as interest rates are set at higher and higher rates, it became harder to borrow and the price of those tech stocks start to fall. So pro investors were paying a lot of attention to the Fed meeting on Wednesday and were refreshing their news apps like every five seconds to see when the announcement came out.

And then it did. So WTF happened? Well, the Fed did raise interest rates again. And like I just mentioned, normally interest rate increases hurt the stock market. However, the stock market reacted quite well to this announcement. Plot twist. I know. I'll tell you why.

We just said that the Fed raised interest rates 75 basis points in November. At the last Fed meeting in December, they raised interest rates 50 basis points, or 0.5%. But on Wednesday, they raised interest rates 25 basis points or 0.25%. So yes, while interest rates are still climbing, the rate at which they are climbing is slowing down. And this signals two important things. First, inflation is slowing down. Otherwise, the jump in interest rates would have been bigger. And second, we may not need to go through more rounds of interest rate hikes before inflation slows down to a manageable level. Both of these indicators made investors very, very happy. And on Wednesday, the S&P 500 actually ended closing up 1% higher than how it

started at the opening bell. Now, don't get me wrong, inflation is not over. But smaller interest rate increases are wins. And we'll take the wins wherever we can get them in this economy. For today's tip, you can take straight to the bank. While interest rates aren't going up and up at the same sprint they were last year, rates are still going up. Meaning you can expect things like the APR on your credit card to be higher in the future than it is now. So if you have credit card debt, see if you can start contributing a little bit more to paying it down sooner. That way, you'll end up paying less in interest overall by shrinking your debt before interest rates go up again.

Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.