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Chapter 1: What recent Federal Reserve news should investors be aware of?
Hello and welcome to Friends That Invest, the podcast that feels like a voice note from your favorite finance friend. You're joined today by your host, Sim Kaur. I am so excited to be here. I am wildly passionate about investing and personal finance. And today we are going to talk about what is going on with the Fed, with interest rates and what it means for you and your money.
Because if you are new here, you may not realize that when it comes to investing, Share prices go up when interest rates go down. And when interest rates go up, share prices go down. And so you might be like, okay, Sim, that's not good. Why is this happening? Is this something that's going to occur? And what does this mean for my money? So let's go straight into it.
First things first, the Fed, who are they? What do they mean? What are they trying to do to me? And how does it affect my money? The Fed is essentially like the bank of banks. So in New Zealand, we have the Reserve Bank. And in the States, they have the Federal Reserve. We're not really like... that creative when it comes to naming them. But they are the bank for banks.
And when normal banks like your local bank, your Wells Fargo, your American bank, your New Zealand bank, your NAB, when those banks come along and they go, hey, Sim, I will offer you a mortgage. I will give you the cash for your mortgage, but I'm going to give you it at a mortgage rate of 4%. they only set that rate because of how much it costs them to have the debt.
And so the Federal Reserve goes, hey, we will give you money at 3% and therefore you can sell it on at 4%. But if the Fed goes, we're going to set the rate at 5%, then the retail banks, the banks that you and I go to to get a mortgage or to get a loan or to put our money into, they have to set their mortgage rates slightly higher so they can make a little bit of profit.
I mean, that's what the banks... You thought the banks were here to look after your money?
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Chapter 2: How do rising interest rates affect share prices?
No. They are here to make a profit off your money. And so that leads into the question, well, Sim, who is the Fed in the States? Like, what's going on here? And recently, the new Fed chair has been sworn into the US. This is kind of like when the Pope changes, but in the financial world, like the finance bros have a new Pope. His name is Kevin Walsh. He was replacing Jeremy Powell. And this was...
Not something that people were like surprised by because you can only be in the Fed chair for so long. And Jeremy, when he left, had some beef with Donald Trump just because Donald Trump was encouraging him to like lower interest rates. And he was like, I don't, you know, like bow down to anyone. It's like when Henry VIII was saying to the Pope, like, you need to allow me to get a divorce.
And he was like, that's not allowed in the Catholic Church. Now, I'm not saying Donald Trump has now gone off and like started his own religion or like a new Fed, but a new Fed chair has come in. Not a good thing, not a bad thing, just some change. It's like new management's come in.
And what we know about Kevin Walsh is that it's kind of hard to say if he is someone that's going to increase interest rates, if he's going to decrease interest rates. Ideally, we want him to keep interest rates low. But there is a little bit of rumors on Wall Street that interest rates are going to rise. So let me read some information that I've come across.
So according to the CME FedWatch tool, there is a 70% chance of the Fed raising the federal funds rate by the end of this year. The heaviest odds, more than 40%, are on the Fed doing one quarter point rate heights from the current target of 3.5% to 3.75%. And they see a 22% chance of two hikes.
So essentially, the Fed has two opportunities till the rest of the year to increase, decrease or keep the rates the same. And a lot of people are saying, yeah, there's probably a chance they'll increase it at one point, but not that many people think that at every conversation that they have over the next two conversations that they're going to increase it again and again.
So what does this mean for you? What is this going to do to markets? So an increase in rank heights can be kind of broken down into different groups of people. So let's start off with homeowners.
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Chapter 3: What impact do interest rates have on homeowners and renters?
Those are kind of like the easiest group to understand because if you are a homeowner and interest rates go up, then your mortgage interest rates are going to increase as well. Now, our American friends are very lucky because they get to lock in interest rates for 30 years.
So if you're one of those lucky humans that locked in a 3% or a 2.5% interest rate on your mortgage, you are sticking that out. Whereas we're not so lucky in New Zealand and Australia, and I believe Canada as well, our mortgage interest rates kind of go on a rolling period of like five years, three years, two years, one year, or you can just have it at a floating rate.
And so that means that maybe for a few years, you might have a 4% interest rate but the time that it then comes to revolving your interest rate to rolling it over and getting a new rate you might end up having it higher.
Also if you're an American and you're looking to buy your first home or to buy a piece of property or to take on debt if interest rates increase then now it's going to be a lot higher than like what it looked like five years ago where During the good old days when you had like 2.5% interest rates, like what a different time.
We take a lot of things for granted in hindsight, but I guess that's what hindsight is. Now, the issue for homeowners is that if you have mortgage repayments increasing, suddenly you can't really...
afford that like holiday you wanted to take or you might not go out to dinner as often because like it's expensive having a home so you're going to stay at home if you have investment property for example then you might increase the rent of the investment property so your renters now
have to pay more and so they're also going to be in a much tighter position where if your rent has increased like are you really going to go out and like grab a drink with dinner are you even going to have dinner out or is this going to be like potluck season with our friends again and so it The spending of houses starts to decrease.
Homeowners and renters, basically human beings, are not going to spend as much money when interest rates go up. That then starts having a flow-on effect for businesses because why would you go to the mall and update your mascara when things are kind of expensive? We already have a cost of living crisis. I don't want to go and like spend more money on mascara.
I'm going to keep using the same mascara that I've had for like 12 months. I'm pretty sure I heard someone say that you should be updating your mascara every three months. Blows my mind. That just does not seem reasonable. But, you know, as someone that was an optometrist, I probably should be updating it. more often, but I don't. And that is just the honest truth. We're all honest here.
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Chapter 4: How do businesses react to increased interest rates?
Companies aren't going to spend as much on like trying out new things or being more innovative. It's not really the time to like be taking risks. And then on top of that, we sometimes see job losses or wage freezes, which is already kind of happening. So it is quite scary. Then you kind of look at all that and you go, Sam, like, Job losses, expensive mortgage, no spending, business shutting down.
Like this sounds really sad. Is there any silver lining to interest rates rising? And the answer is yes. I mean, there's two things that you can kind of be a little bit happy about when interest rates rise. The first is interest rates rise to help mitigate inflation.
So when inflation starts to go up a little bit too much and suddenly everything is getting more costly, an increase in interest rates kind of has a flow in effect to help cool inflation down. And so that's why the Fed in the US says, hmm, do you know what? We're going to sort of like put a little bit of pressure on inflation, just start to like push it down.
It's a little bit like whack-a-mole where you push down inflation. But to do that, you have to rise interest rates. And so it's this like delicate dance between it's kind of like being a woman and you don't want to dress too attractive at work because you get the wrong attention, but you also seem to not...
go as far if you appear like you don't care about your appearance and it's this like annoying middle ground that you have to walk the fed has the same issue but the fed is not a woman trying to get a promotion the fed is just trying to keep inflation at bay and also interest rates at bay Maybe not my best example, but you're kind of understanding where I'm coming from.
But as I was saying, there are some silver linings in this. And the first silver lining is that for savers, this is a really good thing. Do you remember when high yield savings accounts were like up to 4% returns or like
3.5 percent returns that is so huge that's like saying if you have a thousand dollars rather than putting it in the share market and like hopefully having a seven percent return you could have a guaranteed four percent return by putting it in a savings account where there is less risk and the return is guaranteed with investing in shares there is always risk and the return is not guaranteed and you can have a negative return so when you're weighing things up and the interest rates go higher
then high yield savings accounts are such a great option because their interest rate increases as well. So right now you might see only like a 2% interest rate or a 2.5% interest rate on savings accounts. But if interest rates increase, then that might also increase. You might see 3, 4, 5%. And so there are some positives in that regard. Let's take a little break. And now back to the show.
You're probably listening to this and going, OK, Sam, it seems like there is a chance that this happens. And I also understand that when the US sneezes, the rest of the world gets sick. And therefore, if interest rates are going to increase in the States, then we'll probably also see this happen in my own country, like in Australia or New Zealand or the UK or Canada.
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Chapter 5: What are the potential consequences of rising interest rates on the economy?
And the next thing that we are going to do is we are going to have three to six months of our living expenses kept aside in cash, not on the share market, in cash because it might get volatile. You might have a job loss or you might have your mortgage rate increase. You might have your rent increase. There can be more uncertainty during times like this.
But if you have enough cash set aside, then it just removes so much weight off your shoulder because you're like, I'm going to be okay. I don't really need to worry. I can pay my bills for the next three months and then figure out my next steps.
And so not freaking out with the market and keeping some cash aside and not logging into your investment portfolio are the three things that you can do and
And if you're one of those people that still have a little bit of extra cash set aside or you are in a position where you can invest more, then continuing to dollar cost average might actually be a really good thing because if the market starts to dip, you're starting to buy shares on sale again. And how good of a feeling is that?
Because recently, every time we buy shares every month for the last couple of months, we're just buying them at higher and higher and higher prices. And it feels good because the overall share market is increasing, but we're buying shares at a more expensive rate per share. And if there is more volatility and we're dollar cost averaging, we can start getting more bargains again.
And so when the next rise happens, we're just like in a much better position. And so that's all I have for you today. I hope you've enjoyed this episode and I hope, hope, hope that you end up subscribing to us on YouTube or end up subscribing to us on Spotify or Apple Podcasts, wherever you get your podcasts. And I just have one little request.
Please, if you found this helpful, take a screenshot, put it on your Instagram story, tag friends that invest. It helps the podcast out so much and it helps us reach more women that want to become financially independent and like what better than a world full of women that have choices. And with that, I'll see you next week.
Disclaimer. Friends That Invest does not provide personalized investing advice for your individual needs. We are not financial advisors. The advice from Friends That Invest exists for educational purposes only and should not be relied upon to make an investment or financial decision. Advice from Friends That Invest is general in nature and does not consider individual circumstances.
Always do your research and due diligence.
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