Interest rates play a significant role in banking, personal investing and the overall condition of the economy. Regardless of whether rates are heading higher or lower, they will have a measurable impact on most all investments and the economy. Determining the cause of interest rate movements is a science that has few masters. Ignoring the movements of interest rates is non the less an unwise choice as many decisions we make about our futures are dependent on these numbers.
Most consumers and bank account holders are affected by what the Federal Reserve Bank does. The Feds actions impact consumer rates as well as business rates and thus impacts employees and employers, savers or borrowers, producers or consumers, the rates on home equity loans, credit cards, CDs, money market mutual funds, money market deposit accounts, commercial loans and a host of other savings and debt products. Most investors are concerned about the near future of interest rates. Interest rates clearly play an essential role in all banking decisions for both the consumer and the financial institutions they bank with. Interest rates should play a essential role in a range of personal finance decisions consumers make regarding savings and bank accounts. We know that interest rates play a key role in macro economic decisions that involve the Fed.
When interest rates are trending up it would be a prudent decision to invest in interest bearing accounts like certificates of deposit for shorter terms rather than long maturities so you can take advantage of new, higher rates as they become available. If it is certain that interest rates are heading down, it would be a better choice to invest in long term CDs and lock in the high rates. These rules would apply to almost all bonds and interest bearing securities.
When the economy slows and the Federal Reserve is sure to apply pressure to drive the fed funds rate lower, most all interest bearing investments will see a drop in yield. Money market funds interest rates will move lower. The interest rate on certificates of deposit will move lower. The interest rates on corporate bonds, municipal bonds and Treasuries will head lower. These changes are certainly going to impact future investment choices by most consumers in savings, banking and account maintenance.
With so many important decisions based on the level of interest rates, it is not surprising that people want to know which way rates are going to move. Most investors and consumers care about the direction of future interest rates. Unfortunately, with so many diverse elements influencing rates, it is also not surprising that people are not able to predict the direction of these movements precisely.
In order to predict interest rates with any degree of reliability the credit markets would be have to be somewhat inefficient. The dynamic force behind our efficient markets is the vast quantity of information available to investors in the market and the profit incentives they have to use this information. Present market interest rates and expectations of future rates are influenced by changes in information that affect the expectations about the future Unfortunately, any new information is unknown until it is in fact released. Skill and success in predicting future interest rates is therefore reliant upon predicting both expectations about the changes in the information and then the market’s reaction to the information.
Even though we it is very difficult to forecast interest rates with any degree of accuracy, how interest rates will move, interest rate movements are not random and are a reaction to the forces that drive them. Understanding how to read interest rate cycles and the economic forces that influence them will greatly enhance your savings position over time. Planning your investment strategies can entail decisions as simple as switching banks when your banks financial offerings stop being competitive to allocating your funds between accounts based on the current interest rates and expectations of future rates. Staying informed about the present state of the market will almost always lead to greater returns in the long run.
The average consumer knows very little about interest rates, whether it’s the present climate or the future direction of rates. Consumer ignorance is the financial institutions best friend on the road to greater profits. Interest rates influence our lives, there is little we can do about or perhaps should do about it. Most bank customer don’t have a clue what makes interest rates move or how this lack of understanding is costing them over time. If we can’t predict interest rates, we can surely increase our returns by undertsanding the how and why of their movements.
Your goal is obtain the highest rates at the lowest costs when you save and pay the lowest rate when you borrow. With the proliferation of bank and finance products that keep coming to our markets, a certain amount of economic and interest rate planning is necessary to avoid any unwanted risks or oppurtunities for higher returns squandered. Banks don’t establish rates based on pyschic input. By learning how rates are determined and the direction that may be headed, many investors can easily earn a lot more interest on their assets.