The economy couldn’t function without a solid banking system, but the financial services sector is much more than just banking. The sector also includes alternative lenders, credit card companies, financial service providers, and increasingly, fintech and cryptocurrency businesses, and more. 

However, banks are the backbone, holding and providing the money that consumers spend to keep businesses open. Banks also help people invest money, and potentially build wealth. Additionally, banks provide loans and financial services to businesses which can help them grow and stay in business. 

This sector, which employs over 8.5 million people in the U.S. as of September 2021, keeps money flowing between businesses and people. Financial services contribute about 8% to the gross domestic product of the U.S. And as of the second quarter of 2021, finance and insurance businesses accounted for almost $3.6 trillion of GDP.

As of 2020, there were 4,377 commercial banks insured by the Federal Deposit Insurance Corporation (FDIC) in the U.S., with almost 75,000 branches across the country. And total assets held by U.S. banks totaled almost $22.6 trillion. In 2020, the four biggest banks in the country—JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo—held a record $10 trillion in total assets. 

Source: Federal Reserve, June 2021

How do banks earn money?

Banks earn money in a variety of ways. You may not know it, but when banks take your money as a deposit, they also lend it out to others and make money from the interest they charge on the loan.

That interest can be for loans such as mortgages and credit cards. But banks can also charge fees on checking and savings accounts, such as overdraft or under limit charges.

Banks that issue credit cards also collect a portion of interchange, which is a fee charged to merchants for accepting cards for payment.

And many of the largest banks, known as Wall Street banks, have prominent investment divisions, which charge for stock and bond trading, as well as for their services involved in bringing companies public, through a process called an initial public offering (IPO).

A changing landscape for financial services

Since the financial sector is so essential to the economy, it tends to be heavily regulated, both at the state and federal level. Those regulations ensure that banks meet capital requirements that ensure they have enough cash on hand to meet their obligations to consumers and businesses. They also help to diminish some of the risk they might otherwise take in their investments. Yet other regulations also lay out principles that ensure they behave ethically toward consumers, for example by lending fairly.

The two main overseeing bodies for commercial banks are the Federal Deposit Insurance Corp.(FDIC), which insures consumer deposits, and the Office of the Comptroller of the Currency (OCC)which tests the solvency of banks.

Following the financial crisis of 2009, regulators put in place a new set of requirements called the Dodd-Frank Act that protect consumers from abusive lending practices, and that prevent banks from getting “too big to fail.”  In 2018, however, Congress voted to roll back some of the restrictions outlined in Dodd-Frank for banks with less than $250 billion in assets, easing their reporting requirements and capital restrictions. 

Role of the central bank

There’s another component to the financial sector in the U.S. that’s important to know about.

It’s called the Federal Reserve System.

The Federal Reserve, also known as the Fed, is the central bank of the U.S. It comprises 12 district banks located throughout the country, which together are responsible for the monetary policy of the U.S.

The Fed’s mission is to oversee the health of the nation’s financial system. It attempts to keep the economy strong and growing by enacting policies to maintain low inflation and healthy employment levels. It does this primarily by adjusting interest rates and lending money to the nation’s banks.

The Fed sets something called the overnight funds rate, which is also known as the federal funds rate. This rate dictates how much it costs for banks to lend their money to other banks, specifically the central bank. The Fed can manipulate the rate in certain ways, which can have effects throughout the economy.

For example, at the start of the pandemic, the Fed lowered the federal funds rate to almost zero percent to stimulate the economy with so-called cheap money in the form of low-interest loans.  The Fed has kept the rate there, and has been hesitant to increase it, since the economy is still recovering. But that influx of cash has push inflation up, and maybe keeping inflation higher than normal.

The future of banking 

While commercial banks and the Federal Reserve make up the traditional banking sector, new technology is shaking up the banking industry. And new financial services companies (such as Stash), known as FinTech companies, are disrupting the market.

Today, there are hundreds of such companies changing the way we bank, spend, lend money, accept payments, finance our businesses, apply for mortgages, and more.

Perhaps the oldest and best-known is Paypal, which in the early days of the Internet allowed people to pay for things online in a secure manner, using either a credit card or a bank account.

Paypal is a multibillion-dollar company. It’s also facing disruption by a host of startups including Stripe, Venmo, Dwolla, and Square.

In short, the financial services industry is moving beyond handing hand-written checks to your local bank teller. Banking is becoming global and mobile, giving more people the ability to access their money from wherever they are in the world.

Cryptocurrency and financial services

Cryptocurrency, a digital asset that doesn’t rely on physical currency, is also changing the financial services sector. Cryptocurrency uses something called blockchain, or distributed ledger, software. That means code produces an encrypted record of the value of each virtual coin and the transactions it’s involved in, distributing that record across numerous networks on the Internet. Distributed ledger is different from the way your bank keeps track of your dollars, in a centralized database that only it controls, cryptocurrency experts say. Since its introduction in 2009, more than 2,000 types of cryptocurrency have emerged, including Bitcoin, Ethereum, Stellar, and Binance Coin. 

Cryptocurrency has also opened the door for something called decentralized finance, or DeFi. DeFi is an economy that’s entirely online and based on cryptocurrency, typically Ethereum. Businesses in the DeFi industry, often called DeFi apps or dapps, operate by taking out the middleman: traditional banks. Rather than requiring the many steps banks use, DeFi uses the technology behind cryptocurrency to securely and automatically carry out financial transitions, such as loans, peer-to-peer transactions, and more.

It’s important to remember, however, that cryptocurrency isn’t recognized as an official currency, and it has a tendency to be highly volatile. So you should keep that in mind if you’re interested in cryptocurrency or participating in DeFi.  

Investing in financial services

Banks aren’t just places that hold and move your money. They’re businesses, and you can invest in them. You can invest in individual stocks of financial services. Stash also offers exchange-traded funds (ETFs) within this sector. 

If you do decide to invest in financial services, you should know that investments in this sector tend to be cyclical, meaning that they respond to changes in the economy. When the economy is doing well, financial services also tend to perform well, and vice versa. 

Following the Stash Way can help protect you from market volatility. You can follow the Stash Way by investing regularly in a diversified portfolio that includes stocks, bonds, and ETFs across a variety of sectors. 

The post What the Financial Services Sector is All About appeared first on Stash Learn.

Update, Tuesday, October 30, 2019: The  Fed cut the federal funds rate by a quarter of a percentage point again, due to weakening business investment and exports, and concerns about the global economy, it said in a statement. The Fed’s benchmark rate is now between 1.5% and 1.75%. The current rate cut is the third this year. The Fed also said that consumer spending remains strong and inflation is low, keeping the economy resilient for now, according to reports. Find out more about rate cuts in the story below.

Update: On Wednesday, September 18, 2019, the Federal Reserve cut its benchmark interest rate again by a quarter of a percentage point, citing the uncertainty of global economies and low inflation in the U.S. The federal funds rate is now between 1.75% and 2%. Read our story from July for an explanation of what the federal funds rate is, why the Fed is cutting interest rates, and what it means for the interest rates you pay on loans.

On Wednesday, July 31, 2019, the Fed cut its benchmark interest rate for the first time in more than a decade.

By cutting something called the federal funds rate, the Fed said it was helping to keep the economy growing, according to a statement.  The Fed may also be trying to head off the possibility of a recession in coming months as global economic growth slows and the impact of the trade war is felt more, according to reports.

Here are more details:

• The Fed, the nation’s central bank, cut something called the federal funds rate by 0.25%, or a quarter of one percent.
• The federal funds rate is now at a rate between 2% and 2.25%.
• The rate cut was not a surprise. The central bank set the stage for its current move during its last meeting in June, when it chose not to increase interest rates.
• This is only the fifth time in 25 Years that the Fed has cut rates.

Read our related coverage here.

Why cut interest rates now?

The Fed tends to cut interest rates when the economy is weak. But by all accounts, the U.S. economy is still going strong. Unemployment is at a 50-year low, inflation remains below 2%, and consumer spending is healthy.

However, there has been a slowdown in manufacturing, and concerns continue about the unresolved trade dispute with China, which could decrease economic growth domestically and globally, according to reports.

Also, while the central bank is supposed to operate independently from politics, President Trump has pressured the Fed to lower interest rates, saying the rate increases over the past few years have slowed economic growth.

It raised rates four times in 2018. The last time the Fed raised rates was in December 2018.

What does cutting interest rates do?

Cutting interest rates often lowers the cost of borrowing, which might make it more appealing for consumers and businesses to take out loans, and to buy more things, which could stimulate the economy.

Cutting interest rates could also lower the interest rates that consumers receive on savings accounts, or other interest-bearing accounts.

The last time the Fed cut interest rates was in 2008, at the height of the recession. At that time, the central bank reduced interest rates to 0% for a time to stimulate the economy. Low-interest rates helped the economy recover over time.

What does the Fed do again?

The Federal Reserve is the central bank of the U.S. It oversees 12 district banks, which together are responsible for the monetary policy of the U.S.

The Fed’s mission is to oversee the health of the nation’s financial system, and the economy. It attempts to keep the economy strong and growing by enacting policies to maintain low inflation and healthy employment levels. It does this primarily by adjusting interest rates, and lending money to the nation’s banks.

The central bank can adjust something called the federal funds rate, which is a short-term rate that it charges banks to borrow and lend money to one another. The federal funds rate forms the basis of other interest rates, such as for credit cards and mortgages, and it even factors into the yield offered by many bonds and the interest on savings accounts.

The Fed has been steadily increasing interest rates since 2014. The increases follow a seven-year period when the central bank left interest rates at or below 0%, to stimulate the economy following the recession.

Since 2015, the Fed has increased interest rates nine times.

The post What’s Behind the Fed’s Recent Rate Cut? appeared first on Stash Learn.

It’s the third time this year the Fed has hit the pause button, after years of gradually increasing something called the federal funds rate.

The Federal Reserve (the Fed), is the nation’s central bank, and one of its goals is to oversee the health of the nation’s financial system.

Here are more details:

• The Fed left the federal funds rate at a range between 2.25% and 2.5%.
• The federal funds rate forms the basis of other interest rates, such as for credit cards and mortgages, and it even factors into the yield offered by many bonds.
• When interest rates go down, consumer and business borrowing can become cheaper.
• After its interest rate decisions, the Fed typically issues a statement that many experts examine for meaning. This month’s statement dropped the word “patient” from its text, a word that appeared in May’s statement to describe the Fed’s attitude toward future interest rate hikes. By dropping the word, the Fed suggested it might consider making cuts to the federal funds rate if the economy experiences difficulty later this year, Bloomberg reported.
• The reasons for a potential rate cut are complicated, but they could include low inflation, a softening employment market, weakening global growth, the unresolved trade disputes with China and Mexico, which could act as a drag on the economy, particularly in the manufacturing sector, according to reports.
• Although the central bank is supposed to operate independently from politics, President Trump has pressured the Fed to lower interest rates, saying the rate increases over the past few years have slowed economic growth.

What does the Fed do again?

The Federal Reserve is the central bank of the U.S. It oversees 12 district banks, which together are responsible for the monetary policy of the U.S.

The Fed’s mission is to oversee the health of the nation’s financial system. It attempts to keep the economy strong and growing by enacting policies to maintain low inflation and healthy employment levels. It does this primarily by adjusting interest rates, and lending money to the nation’s banks.

The central bank can adjust something called the federal funds rate, which is a short-term rate that it charges banks to borrow and lend money to one another. The federal funds rate forms the basis of other interest rates, such as for credit cards and mortgages, and it even factors into the yield offered by many bonds.

The Fed has been steadily increasing interest rates since 2014. The increases follow a seven-year period when the central bank left interest rates at or below 0%, to stimulate the economy following the recession.

It raised rates four times in 2018, and its current benchmark rate is between 2.25% and 2.50%. The last time the Fed raised rates was in December 2018.

What do rate changes mean for the stock market?

In December news of an interest rate hike sent stock indexes tumbling, because the Fed also suggested the pace of economic growth might cool off in the next year.

When interest rates go up, it can also make borrowing costs for businesses, not just consumers, increase as well. That can eat away at profits for some companies, and that can also factor into stock market swings.

But markets also dropped in May when the Fed left rates unchanged after its last meeting.

Following the June meeting, markets increased modestly.

Check out this message about the value of long-term investing (and avoiding market noise) from Stash’s CEO Brandon Krieg.

The post The Federal Reserve is No Longer ‘Patient’ appeared first on Stash Learn.

The nation’s central bank, known as the Fed, sets a key interest rate that determines interest rates that consumers pay on everything from credit cards to car loans, as well as the interest paid on bank accounts, among other things.

By leaving interest rates where they are, the Fed is reversing a policy of rate increases that it followed throughout 2018. It cited low inflation and strong employment as reasons for staying the course, but also noted consumer spending is slowing.

Here’s a short explainer on the Fed, and its role in the economy, and setting interest rates.

What does the Federal Reserve Do?

The Federal Reserve is the central bank of the U.S. It oversees 12 district banks, which together are responsible for the monetary policy of the U.S.

The Fed’s mission is to oversee the health of the nation’s financial system. It attempts to keep the economy strong and growing by enacting policies to maintain low inflation and healthy employment levels. It does this primarily by adjusting interest rates, and lending money to the nation’s banks.

The central bank can adjust something called the federal funds rate, which is a short-term rate that it charges banks to borrow and lend money to one another. The federal funds rate forms the basis of other interest rates, such as for credit cards and mortgages, and it even factors into the yield offered by many bonds.

The Fed has been steadily increasing interest rates since 2014. The increases follow a seven-year period when the central bank left interest rates at or below 0%, to stimulate the economy following the recession.

It raised rates four times in 2018, and it’s current benchmark rates is between 2.25% and 2.50%. The last time the Fed raised rates was in December, 2018.

Although the central bank is supposed to operate independently from politics, President Trump has pushed back heavily against the increases, fearing they could affect the stock market. He recently suggested on Twitter that the Fed should slash interest rates, something the Fed did not think was necessary.

What does this mean for the stock market?

In December news of the interest rate hike sent stock indexes tumbling, because the Fed also suggested the pace of economic growth might cool off in the next year.

When interest rates go up, it can also make borrowing costs for businesses, not just consumers, increase as well. That can eat away at profits for some companies, and that can also factor into stock market swings.

Markets dropped on Wednesday, because the Fed did not cut rates, according to CNBC.

Check out this message about the value of long-term investing (and avoiding market noise) from Stash’s CEO Brandon Krieg.

The post What’s Going on With the Federal Reserve and Interest Rates? appeared first on Stash Learn.

That’s right. On Tuesday, the Federal Reserve said it would increase interest rates by a quarter of a percentage point to between 1.75% and 2.00%

The Fed just raised interest rates in March. In fact, this is the fifth time since 2017 that the nation’s central bank has increased something called the federal funds rate. And two more rate hikes this year are likely, according to reports.

What does this mean for you?

A higher federal funds rate could make it more expensive for consumers to borrow money for mortgages, on credits cards, and for automobile or student loans, among other things.

And if you’re carrying a credit card balance, the increase in interest rates could be of particular concern. That’s because credit cards have something called a variable rate. Variable rates change to reflect increases and decreases in benchmark interest rates.

Interest rate: A rate charged by a bank for borrowing money.

Why is the Fed doing this?

Unemployment is at a record low, of 3.8%. As the U.S. returns to nearly full employment, wages have gone up, as workers demand more money for their jobs. That’s also caused inflation to rise. (Find out more about inflation here.)

“The economy is doing very well. Most people who want to find jobs are finding them,” Jerome H. Powell, the chairman of the Fed, said during a news conference, according to the New York Times.

By increasing interest rates, the Fed hopes to combat inflation, by making it more expensive for businesses and consumers to borrow. Higher rates can cool down the economy and put the brakes on inflation.

Background

The benchmark interest rate is now back to where it was in 2008, prior to the financial crisis. In June of 2017, the Fed raised its rate to between 1.00% and 1.25%

The Fed dropped rates to near 0% during the Great Recession, to stimulate the economy.

Key terms:

Interest rate: A rate charged by a bank for borrowing money.

Federal funds rate: a short-term rate, set by the Federal Reserve. It’s the rate charged for one bank to borrow money from another. The federal funds rate forms the basis of other interest rates, such as credit cards and mortgages. It is also referred to as the discount rate.

The Federal Reserve: The nation’s central bank oversees monetary policy and attempts to make sure the economy is running smoothly. Find out more about the Fed here.

The post Borrowing Money is About to Get More Expensive. Here’s Why appeared first on Stash Learn.

On Wednesday, the Federal Reserve announced it will increase its benchmark interest rate to between 1.5% and 1.75%, and suggested rates would go up at least two more times in 2018.

This is the fourth time the Fed–which is the central bank of the U.S.–has raised interest rates since 2017, and it’s the sixth time since the financial crisis, which began in 2008. The move was widely expected, according to reports, and it further signals the confidence the central bank has in the economy

“The labor market has continued to strengthen and that economic activity has been rising at a moderate rate,” the Fed said in a statement on Wednesday. “Job gains have been strong in recent months, and the unemployment rate has stayed low.”

Newly appointed chairman of the Fed, Jerome Powell, announced the news in his first meeting with other central bankers. Powell was appointed in October to replace former chair Janet Yellen.

How does the Fed increase interest rates?

The central bank is increasing a rate called the federal funds rates, which is a short-term rate that it charges banks to borrow and lend money to one another. The federal funds rate forms the basis of other interest rates, such as for credit cards and mortgages.

The Fed has been slowly increasing the federal funds rate for the last two years as economic growth has gathered steam. In December, it raised this rate to between 1.25% and 1.5%. In June, it raised this rate to between 1.0 and 1.25%.

The increases follow a seven-year period when the central bank left interest rates at or below 0%, to stimulate the economy following the recession. Officials hoped lower rates would prompt consumer spending and bank lending, among other things.

Back, in 2015, Federal Reserve Chairwoman Janet Yellen made news when she announced the bank would increase the federal funds rate to a range between 0.25% and 0.5%.

The federal funds rate is sometimes referred to as the overnight rate, because banks conduct the lending and borrowing after daytime business hours.

Increasing interest rates and credit cards

A higher federal funds rate is likely to make it more expensive for consumers to borrow money for mortgages, charge on credits cards, and take out automobile or student loans, among other things.

And if you’re carrying a credit card balance, the increase in interest rates could be of particular concern. That’s because credit cards have something called a variable rate. A variable rate changes to reflect increases and decreases in interest rates. (That’s in contrast to a fixed interest rate, which as its name implies, stays the same no matter what.)

If you’re carrying a credit card balance, now might be the time to consider paying it off, or reducing it significantly if you can.

“Variable rate debt is where you are most susceptible as interest rates rise,” Bankrate analyst Greg McBride recently told CNBC.

Credit card debt is at a record high in the U.S., totalling more than $1 trillion in 2017.

Although most mortgage rates are fixed, some mortgages carry variable rates as well. These are called adjustable rate mortgages, or ARMs, and rates on these mortgages also rise when interest rates increase, making it more expensive for homeowners.

Higher interest rates aren’t always a bad thing, however: They can also lead to increased rates for bank savings accounts, for example.

“Job gains have been strong in recent months, and the unemployment rate has stayed low.”

What does the Federal Reserve do?

The Federal Reserve is the central bank of the U.S. It oversees 12 district banks, which together are responsible for the monetary policy of the U.S.

The Fed’s mission is to oversee the health of the nation’s financial system. It attempts to keep the economy strong and growing by enacting policies to maintain low inflation and healthy employment levels. It does this primarily by adjusting interest rates, and lending money to the nation’s banks.

The post Why Does the Fed Keep Hiking Interest Rates? appeared first on Stash Learn.

You’re probably well aware of how supply-and-demand works when it comes to things like the price of oil, or consumer products like iPhones and Air Jordans. More demand tends to create higher prices, and vice versa.

The same is true for money:  The more dollars the Federal Reserve prints, the less each one is worth. Obviously, if there were only, say, a million dollars in the entire world, each one would be worth a lot more than if there were one billion.

This is what economists are talking about when they refer to inflation.

The dollar becomes inflated as its production begins diminishing its purchasing power. We see this every day in our experience as consumers. Twenty dollars doesn’t buy as many groceries as it did ten years ago.

Using the Consumer Price Index (CPI) inflation calculator, you can see that the U.S. dollar is worth about half what it was 30 years ago.

Aside from what inflation does to purchasing power, there are two other specific areas where you should understand inflation’s effects.

Retirement planning

Inflation can be especially hard on your retirement-planning efforts because there are limits to how much money you can contribute annually. The dollar’s purchasing power can drop significantly in 30 years.

That can affect retirement savings.

Treasury bonds

Treasury notes and other government bonds can provide investors one main advantage: consistent returns year-after-year. While these amounts can be humble, if you crave security, they’re something to consider.

Unfortunately, as you’ve probably been able to guess by now, this means they could actually pay out less as inflation goes up.

To make matters worse, as inflation goes up, investors sometimes rush to sell their bonds. They want to take their money and put it into something that won’t depreciate in value year-after-year.

The only way the Treasury can combat this is by offering higher yields to make them more attractive, but doing so increases the interest rates for most mortgages.

When that happens, there are a few noteworthy consequences:

• The value of investments goes down
• The federal government needs to spend more on financing its debt
• Interest on the national debt goes up

These added expenses to the national budget need to be offset either by cutting the country’s discretionary budget or increasing taxes. The only other option is even more deficit-spending, which slows economic growth.

None of these things are good for the consumer.

Try not to let inflation diminish your savings

As you can see, inflation is often not a good thing for your savings. While some inflation is necessary to spur the economy as a whole, the effect is always the same for the individual consumer: their money is worth less.

Inflation doesn’t have to hurt your savings, though. By investing your money, you essentially trade savings for other type of assets, like stocks, or real estate. These investments tend to be less affected by inflation than cash sitting in a savings account.

Looking to start investing instead of keeping cash savings? Stash helps you invest in the stock market with as little as $5. In fact, StashLearn is also giving new investors a special $5 sign-up credit to get started by just subscribing here.

The post How Can Inflation Affect You as a Consumer? appeared first on Stash Learn.

The Dow fell 666 points on Friday, which was its largest single-day decline since June, 2016, and the sixth-largest drop in the history of the index. Other indexes, including the S&P 500 and the Nasdaq followed, both dropping about 2% as well, according to reports.

It’s been a sudden turnaround for the stock market, which has risen to record highs over the last 12 months.

So what happened? We’ll explain:

Inflation, interest rates, and employment

Interest rates are rising

The Federal Reserve, the nation’s central bank responsible for setting monetary policy, has been increasing interest rates for the past few years. It did so in twice in 2017; And it’s expected to raise rates again in 2018.

Typically the Fed decreases rates when the economy is doing poorly, as a way to increase borrowing and spending, and it increases rates when the economy is doing well, as a way to apply the breaks when it’s afraid the economy may be overheating.

We’re on track for Gross Domestic Product (GDP) growth of about 5.4% in the first quarter, after years of growth closer to 3%. Too much GDP growth can spark fears of inflation, and with it the prospect of more rate increases.

Businesses, investors, and financial experts fear that both interest rates and inflation are on the rise, which can have a negative impact on the economy and the stock market.

Good to know: An interest rate is what’s charged on a loan, including mortgages, car loans, credit cards, and bonds. Inflation is an increase in the cost of goods and services that make up segments of the economy.

We’re approaching full employment.

It may seem strange, but Friday’s market drop occurred on the same day that the U.S. Department of Labor released positive news in its monthly jobs report. In January, employers added a healthy 200,000 new jobs, and the unemployment rate fell to 4.1%, its lowest rate in 17 years, according to reports.

While that’s great news for workers, The U.S. may be approaching what’s called full employment. In simplest terms, that means everyone who wants a job, or has been looking for one, has found one and is working.

Strong employment tends to push up wages–which have increased by about 2.9% in the past year, according to reports, which can spur consumer spending. And to cope with higher wages, businesses tend to raise their prices for the goods and services that consumers rely on every day, from gasoline for their cars, to toothbrushes and grocery items. All of this increases the risk of rising inflation.

Inflation has been running at levels of less than 2% annually, which is very modest.

But rising inflation can have a negative impact on markets.

Bonds are suddenly more attractive

Bonds, which are generally considered safer investments, are essentially IOUs from a company, city, or the federal government. As the Fed has steadily increased interest rates, the yields on bonds have gone up, too. For something called the 10-year Treasury, which is issued by the U.S. government, the yield has increased to 2.85%, which is half a percentage point higher than what it was a year ago.

Generally speaking, higher yields makes bond buying attractive for some investors, so more money is leaving the stock market for the bond market.

Higher bond rates also increase costs for businesses

Businesses, in particular large public companies, issue bonds to raise money to fund operations. Increasing interest rates can make it more expensive for them to borrow money.

Rising inflation can have a negative impact on markets.

Think of it like your credit card–when the interest rate goes up, it becomes more expensive to charge the things you want or need.

Higher borrowing costs can depress stock prices for public companies.

Is a market drop a bad thing?

Not necessarily.

The current bull market is one of the longest on record. Numerous financial experts and analysts have said the run up in stock prices, and stock indexes–before today, the S&P 500 was up nearly 18% for the year*–can’t be sustained.

And the sell-off could be a sign of things returning to normal, according to some experts.

The post What’s Causing Markets to Drop? appeared first on Stash Learn.

President Trump has named Jerome Powell as the next chairman of the nation’s central bank.

Pending Senate confirmation, he will replace Janet Yellen, the first woman to head the Federal Reserve, who was appointed by President Obama in 2014. Yellen’s term expires in early 2018.

By tapping Powell, Trump is breaking with tradition. Presidents usually allow their predecessor’s Fed chair picks to remain on the job for a second term. But Powell is reportedly considered a safe choice who is likely to continue on with his forerunner’s policies.

Jerome Powell will replace Janet Yellen, the first woman to head the Federal Reserve, who was appointed by President Obama in 2014

Who is Jerome Powell?

Powell, a Republican, has been a member of the Federal Reserve’s seven-member Board of Governors since 2012. He also served as an Undersecretary of the Treasury for George H.W. Bush, and was an attorney and investment banker in New York, according to his Federal Reserve profile.

He was a partner at the private equity firm Carlyle Group, where he reportedly amassed a personal fortune of up to $55 million. He has a reputation as a consensus builder who studies issues carefully before making decisions, according to the Washington Post.

Yellen has overseen interest rate increases as the economy has improved, and ended a bond repurchase program associated with the financial crisis.

Powell is considered a reasonable pick who won’t dramatically alter the course of the central bank. He is, however, considered by some to be more pro-business with regard to regulations than his predecessor.

What does the Federal Reserve do?

The Federal Reserve is the central bank of the U.S. It oversees 12 district banks, which together are responsible for the monetary policy of the U.S.

The Federal Reserve’s mission is to oversee the health of the nation’s financial system. It attempts to keep the economy strong and growing by enacting policies to maintain low inflation and healthy employment levels. It does this primarily by adjusting inflations rates, and lending money to the nation’s banks.

The central bank was responsible for making sure the financial system didn’t freeze up during the financial crisis that began in 2008. It flooded the banking system with cash, and decreased interest rates to below 0%. It also was responsible for a program called quantitative easing, where it bought up trillions of dollars worth of government bonds, which helped shored up the financial system.

The post Who is Jerome Powell? Meet Trump’s New Fed Chair Pick appeared first on Stash Learn.

And it seems everyone has an opinion.

Here’s a quick breakdown on why interest rates are an especially hot topic right now:

How Low Can You Go?

The Federal Reserve (better known as The Fed) sets interest rates “to help set the backdrop for promoting the conditions that achieve maximum sustainable employment, low and stable inflation, and moderate long-term interest rates.”

In 2008, the Fed made a number of financial decisions to ease the shock of the Great Recession, when the nation was hit with a banking and housing crisis. One of these ways was to lower interest rates to near zero.

This was seen as a way to jumpstart the wheezing economy by encouraging employment, economic growth and spending. The theory: Lowering the Fed’s key interest rate would keep people spending on the things that help make the American economy grow.

Lower interest rates would encourage Americans to start spending money again, thereby stimulating growth. Recession-scared people could obtain mortgages for new homes or construction or say, a new car at a lower rate.

Businesses would also benefit from lower interest rates. They would have incentive to buy equipment, hire more employees, remodel, and build new factories because they’d be able to borrow cheaply. In short, they could plan for the future.

The Fed kept interest rates at this low level for years, only incrementally raising them in 2015. Yellen surmised that the economy had recovered enough from the Great Recession to handle a gentle increase in interest rates.

Why raise interest rates?

Low interest rates sound pretty good! Cheap rates on mortgages and cars. What could be bad? Here’s the thing. Interest rates affect more than just the things we buy. They affect how much we save.

A low interest rate economy might be great for spenders but it makes life tough for savers. With low rates, people who hold variable interest rate debt (debt that can increase or decrease, such as an adjustable rate mortgage or interest on a credit card) have seen the value of their debt effectively decrease. But people who hold bond investments run the risk of negative investment returns when rates rise again.

The other problem with keeping interest rates artificially low: there’s nowhere to go from near-zero in the event we fall into another recession.

Keeping rates this low has been controversial. Some economists believe that allowing Americans to believe that this era of easy lending will never end creates a false economic reality—and could lead to another bubble.

What’s Happening Now

It isn’t a matter of if the Fed will raise interest rates. It’s how quickly.

“Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road—either too much inflation, financial instability, or both,” she told the Commonwealth Club of California in San Francisco back in January.

Policymakers are expected to raise the rate “a few times a year” through 2019, putting it near the long-term sustainable rate of 3 percent.

Increasing interest rates will affect those looking to buy homes or make large investments in their business as well as interest on credit cards. It will also affect banks and their ability to lend money

Tl;dr

Ultralow interest rates were put in place to prop up the American economy when it was struggling from the Great Recession. By easing interest rates back up, the hope is that Americans will start saving (and continue spending), that the U.S. dollar will strengthen and that employment will stay steady.

A slow raising of interest rates aren’t felt right away. Changes in monetary policy (which includes interest rates) can take up to 18 months for the economy to feel—and react.

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