As we approach new economic changes, the "what-if monster" rears its head again. This time, we're hearing worried whispers, "What if the Fed changes interest rates?"

What happens if the FED decides to raise, lower, or hold the interest rate? Any change, or even stasis, could potentially have an impact on your finances. After all, the FED plays a critical role in the economy, and interest rates have far-reaching consequences. It's only natural to worry, but with preparation for financial stability, you can make sure the "what-if monster" doesn't keep you up at night.

How the Fed Affects Interest Rates

The Federal Reserve, or "The Fed," uses interest rates as a tool to keep the economy healthy. Interest rates can be used to control inflation, stimulate economic growth, or keep a hot economy from overheating. In the past few years, interest rates have been increasing rapidly to combat inflation. If the Fed changes interest rates, what next?

Will the Fed raise, lower, or hold the rate — and what effects might these choices have?

• Rate Increases: If the interest rates rise, borrowing becomes more expensive. This can impact mortgages, credit cards, and business loans. However, it also means higher returns for savings and interest-bearing accounts.
• Rate Decreases: If the interest rate drops, it can boost economic activity because borrowing becomes more affordable. However, it will lower returns on savings and bonds.
• Holding Rates Steady: If interest rates remain steady, this can indicate economic stability. However, uncertainty can still cause fluctuations in other aspects of the market.

What It Means for Investments If the Fed Changes Interest Rates

Fed decisions regarding the interest rate are often accompanied by market volatility. While that volatility can be the cause or result, long-term investment strategies work best when investors hold fast. Long-term strategies are crafted with volatility as a known factor. Markets may rise and fall, and interest rates may fluctuate, but long-term strategies are designed for profitability and stability through many shifting economic trends.

• Stocks: Rate hikes increase borrowing costs, which can cause short-term dips in stock prices. However, markets typically recover when companies adapt to new economic conditions.
• Bonds: Higher rates reduce bond values, but lower rates increase them. New bonds may also offer higher yields at the new rate. Diversification can help to offset fluctuations in bond values over time.
• Real Estate: Higher interest rates impact mortgage affordability. This may dampen buyer activity in housing markets, but it simultaneously opens new opportunities for buyers in the long run once the spikes in demand settle.

The most important thing to remember is that focusing on long-term goals will result in financial stability. You won't need to react emotionally to short-term market changes if you have a diversified portfolio built on long-term investment strategies.

Preparing for Uncertainty

Although economists often have well-developed theories, no one can accurately foresee the Fed's next move. However, you can take steps to fortify your financial plans and ensure you are ready to weather uncertain market conditions.

1. Review Your Portfolio: At CrossleyShear, we specialize in helping clients build diversified portfolios tailored to their unique goals and risk tolerance. Our personalized approach is designed to strategically align investments to support your financial success.
2. Strengthen Your Emergency Fund: In case rates go up, build up a cash reserve to prepare for higher costs and unexpected expenses. This provides long-term stability and short-term well-being.
3. Evaluate Debt: Interest rates can have a significant impact on debt conditions. If you have variable-rate loans or lines of credit, explore your options for refinancing or paying down debt to help reduce your risk of higher interest costs.
4. Focus on Goals: Short-term changes to the interest rate are less worrying when you build long-term financial plans and goals built to withstand unpredictable changes to market conditions.

Keep the "What-if Monster" Quiet

When you can't predict changes to the interest rate, it's natural to feel unsettled. However, these changes don't have to impact your long-term financial plans. The key to financial confidence and economic stability is to be prepared. A solid strategy and our team of trusted financial advisors can help you face market uncertainty confidently.

If you worry about the impact of potential rate changes, we are here to help. Let's review your plan and ensure it's built to weather any shifts the Fed might bring. Don't let the "what-if monster" keep you up at night. Contact us today to build a plan that gives you peace of mind in any financial landscape.

Any opinions are those of Dale Crossley and Evan Shear and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification.