Rising Interest Rates and Their Effects

The Federal Reserve raised short-term interest rates another quarter point today. That marks the fifth rate hike in 2004. The real questions are what is the Federal Reserve trying to accomplish and what does it mean to you...the consumer.

The goal of U.S. monetary policy according to a 1977 Amendment to the Federal Reserve act is to: Promote maximum sustainable output and employment and promote stable prices. The Federal Reserve accomplishes these objectives primarily by (1) raising or lowering the discount rate (what happened today) and (2) buying and selling government securities in the open market.

The Federal Fund Discount Rate is the rate at which sound banks must pay to borrow money from the Federal Reserve. As the financial institutions we deal with each day now have to borrow money at a higher cost they then pass on those costs to the consumer, which results in higher interest rates on credit cards, adjustable rate mortgages, installment loans, etc.

When the Federal Reserve buys and sells government securities in the open market from financial institutions it increases or decreases the money supply. The Federal Reserve increases the money supply when it buys government securities from banks thus providing banks with more liquid money to lend out. The opposite is true when the Federal Reserve sells government securities in the open market.

The Federal Reserve is currently following the policy of increasing the discount rate and selling government securities in order to curb inflation. The less money in circulation, the less spending that occurs, and hopefully this will curb high inflation.

Now the question is...what does the wiser person do with their money now? Their are many differing opinions and all have their rightful place. The Wiser Money blog is recommending the following actions:

• Pay down credit card as fast as possible - the cost of credit card debt is staggering and most of us would be scared if we actually knew how much interest we are paying on credit card debt. ALWAYS PAY MORE THAN THE MINIMUM PAYMENT.
• If you plan to stay in your home past five years lock in 30-year fixed rate mortgages. Your income will increase and the slightly higher payment now will seem like nothing in 5 to 10 years.
• Think twice about a home equity loan. If you really don't need...don't use it. Invest the money you would have paid on the home equity loan.
• Evaluate whether the money you have in institutional savings accounts is earning a fair return. See links below for high interest bearing accounts for consumers.
• Don't pull money out of the stock market - the market is strong and young consumers can weather a storm that may or may not come.
• Avoid purchases on credit cards and store charge cards as much as possible. If you don't have the cash then seriously evaluate whether you need the good or service.

The following links have deemed worthy to be published in the "Wiser Money" blog:

High Interest Bearing Accounts:

• http://home.ingdirect.com/ - 2.25% interest bearing account - no minimums - no fees A++
• http://www.geinterestplus.com/interestplus/index.html - 1.85% to 2.35% - A

Federal Reserve Information:

• CnnFn FED Article - Article
• Federal Reserve Board Introduction - an introduction to the Federal Reserve and its policies. Very informing. Great for research.

Paying Down Credit Card Debt:

• http://www.bankrate.com/brm/news/cc/19980713.asp - Tips and Advice

Remember to Save Wisely, Spend Wisely, and Live Wisely.