What Rising Interest Rates Could Mean for Your Investments

The U.S. economy shifted into higher gear over the summer, and an improving economy generally means higher interest rates, which can affect your investments in numerous ways, good and bad.

Why are people worried about a rate hike? A growing economy can lead to inflation, and to keep it in check, the Federal Reserve (Fed) raises interest rates. A change in the federal funds rate has a ripple effect on other interest rates. People then borrow and spend less, the economy slows and inflation isn’t a problem.

So how are different investments affected?

The yields on money market funds tend to rise with the federal funds rate. This means money market funds may be a good short-term investment option when rate hikes are on the horizon. Bond prices, on the other hand, tend to move inversely to interest rates, so bond prices generally fall with rate hikes.

Stock performance can be mixed when rates are hiked. If an interest rate rise is on the horizon, it’s because the economy is doing well and central bankers at the Fed don’t want it to overheat; that means businesses are probably performing well. But when investors think the Fed is going to raise interest rates (and restrain the economy), stock prices often fall.

Now that the economy is improving, investors are worried about whether it’s time for a rate hike, so please call or email us if you want to better understand how to protect yourself from this eventuality. We’re here for you.