On Wednesday, the Federal Reserve raised short term interest rates by another .25% point. They increased the benchmark rate to a range between 2-2.25%. This is the 8th .25% increase since late 2015 and the third such increase this year.
Based on Fed officials’ projections, they expect to increase rates by another .25% later in 2018, 1% in 2019 and at least one more .25% increase for 2020. This indicates the short term benchmark rate would be slightly higher than 3.25%.
This will mean that for the first time in a decade that short term interest rates will be higher than the rate of inflation, which is currently around 2%.
Fed Chairman Powell said in a news conference that “these rates remain low. This gradual return to normal is helping to sustain this strong economy for the longer-run benefit of all Americans.”
The Fed eliminated the term “accommodative” from the statement they issue after each of their meetings. This and similar terms have been a part of Fed statements since the financial crisis in 2008. Going forward, the Fed will continue to balance their dual obligations to maintain an inflation rate of approximately 2% and the level of unemployment, which is currently low.
The impact on you and your investments
- Short term interest rates have increased quite significantly over the past year. This will benefit you as the interest income you will be earning on the fixed income portion of your portfolio will gradually increase over the next years, as older investments mature.
- For example, the 2 year US Treasury Bill yields 2.83% today, whereas it was only 1.48% a year ago.
- Longer term rates have increased, but to a lesser extent than shorter term rates. Thus, we will continue to invest fixed income portfolios over various years, but in shorter maturities.
- The 10 year US Treasury Note increased from 2.31% a year ago to just over 3% today.
- You should make sure that you do not have excess cash in bank accounts that are still earning hardly anything, as even interest rates on very short term investments are beneficial.
- We remain positive about the economy, as well as both US and global stock markets. While increases in short term interest rates may slow down certain aspects of the economy, the Fed appears to be working towards managing the economy so that it does not overheat and cause inflation to be much greater than 2%.
Felicia and I completed our spectacular trip to Spain on Tuesday. We visited Barcelona, San Sebastián, Bilbao and Madrid.