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Savings Investor Newsletter

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The MoneyRates.com Network

Will a rising federal funds rate hurt the economy?

Amid all the speculation about when the Federal Reserve will begin tapering back from its stimulative, low-interest-rate measures is a persistent subtext: the question of whether the economy has become overly dependent on unnaturally low interest rates.

Certainly, the stock market has acted jittery whenever the Fed signals that it may soon raise rates. However, since raising rates is predicated on the economy showing signs of strength, should people really be so fearful of higher rates?

To get an historical perspective on this question, MoneyRates.com looked at economic growth and stock market performance during periods when the federal funds rate was rising or falling. The numbers suggest that the economy need not fear rising rates, but that stock market investors perhaps should.

Rising interest rates and the economy

Over the past 50 years, real GDP growth has averaged 3.11 percent a year. That growth rate has been stronger in times of a rising federal funds rate than in times when the rate has fallen.

In calendar years when the federal funds rate has increased, real GDP growth has averaged 4.08 percent. In years when that rate has decreased, real GDP growth has averaged just 2.14 percent. The severity of the decrease also seems linked to the strength of.... Read More>>

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  • Ask the Expert:
    Shift my TSP to an IRA?
Answer from Richard BarringtonAnswer from Richard Barrington:
To address first the pros and cons of staying in your federal Thrift Savings Plan (TSP) or shifting to an IRA, that depends largely on how the savings and money market account options within the TSP compare to similar accounts on the open market. You could start an IRA at a wide variety of banks, which would give you more choice when looking for a savings or money market account. If you see a clear interest rate advantage outside the TSP, it might be worth shifting to an IRA.

There are a couple of concerns about your plan that bear raising. First, have you carefully examined your cash flow needs to determine if you can really live on $16,000 a year in semi-retirement, and on potentially less than that ...Read More>>
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Will a rising federal funds rate hurt the economy?
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