Why Does the Fed Raise Interest Rates?
by
Gregory Grant
Every once in a while we see that the Federal Reserve Board -- known as the Fed -- is considering raising interest rates. But why does the Fed raise interest rates?
"It is the job of the Federal Reserve to keep the economy going at a sustainable healthy rate and when they believe it could be moving too fast, then their tool that they use is to raise interest rates," explains Fritz Elmendorf of Consumer Bankers Association.
People considering major purchases like a home or a new car are often the first to feel the sting of a rise in interest rates. But rising interest rates affect everything in the economy, including the stock market. So what does that mean to investors?
"People should be looking into being in more defensive type of securities," says Jonathan Gold of Merrill Lynch. "They should look at utilities, they should look at food groups, they should look at basic companies that are always going to be there in good times and bad and not be in certain things that would have a high degree of risk."
During a period of rising interest rates, certain types of investments that might not usually be considered may become a lot more attractive.
"I recommend that they put themselves into some short term maturities and municipal bonds for individuals and for corporations, I put them into corporate bonds with very short maturities so if the interest rate keeps increasing, I have the ability to move them out longer into the curb if rates continue to go up," says Gold.
When interest rates go up, financial experts recommend making changes in investment strategies that will protect gains made in the bull market and take advantage of higher interest rates.
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When to sell a stock is as important as when to buy a stock. The investor that goes beyond just looking at the financial pages will find that this kind of in-depth research will pay off in helping to make wiser investment choices.