At its November meeting, the Federal Reserve continued their pause on interest rate increases for a second straight month. However, the Fed still hasn’t hit their 2% inflation target, and breaking the inflation bubble is their stated number one priority—so additional hikes can’t be ruled out.
What are some of the impacts investors should consider as interest rates remain high? For starters, locking in what are currently some of the highest interest rates available since 2007 is one of the most important considerations. This can be done by extending the maturity, or duration, of their interest-bearing investments. It’s uncertain how long interest rates will remain at the current levels before the Fed begins to lower rates. Maintaining the benefit of the high rates of return into the future will help protect your longer-term investment returns.
Generally, high-yield savings and certificate of deposit (CD) account yields follow the short-term rates that are established by the Fed, as they each are competing for investors’ cash. Once the Fed stops raising rates, investors should consider if the Fed might begin to lower short-term interest rates shortly thereafter, which will lead to lower expected returns for savings accounts and CD investments.
If the Fed hikes end completely or interest rates begin to drop, extending the maturity of your fixed income investments now will help protect your income returns into the future. Since it is difficult to determine if and when the Fed will pause rate hikes indefinitely or begin lowering them, investors can benefit by averaging into extending maturities as each CD matures to lock in the higher rates of return for a longer time.
Once the Fed begins to lower rates, savings account rates will fall in line with the Fed’s schedule. During this part of the cycle, the advantages of lower rates swing in favor of those obtaining loans – in other words, spenders rather than savers.
If you have questions about how interest rates impact your own portfolio, talk to your RMB advisor today.
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