Interest rates are back in the headlines, and lately I've been getting a lot of questions from clients:
Why are rates changing? What does it mean for my investments? Will mortgage rates change? And should I be doing anything differently?
These are good questions because interest rates affect much more than what you earn at the bank. They influence borrowing costs, bonds, mortgages, businesses, the stock market, and ultimately your financial plan.
Here's what you need to know.
What Did the Federal Reserve Do?
In September, the Federal Reserve raised its target federal funds rate by 0.25 percentage point to a range of 3.75% to 4.00%.
The primary issue continues to be inflation. The Federal Reserve has a long-term inflation goal of 2%, and inflation remains above that level.
It's important to understand that the Federal Reserve does not directly set your mortgage rate, CD rate, or the interest rate on most consumer loans. Instead, its decisions influence financial conditions throughout the economy.
What Does This Mean for Your Cash?
Higher interest rates have had one significant benefit for savers: cash can generate meaningful income again.
Money market funds, high-yield savings accounts, CDs, and short-term fixed-income investments may continue to offer attractive yields compared with what investors experienced for much of the decade before rates began rising.
That doesn't necessarily mean you should move your investments into cash.
Cash can play an important role for emergency reserves and near-term expenses, particularly for retirees. But money intended for long-term goals still needs to be invested according to your financial plan.
What About Bonds?
Interest rates and bond prices generally move in opposite directions. When rates rise, the prices of existing bonds can decline because newly issued bonds may offer more attractive yields.
But there is another side to the story.
Higher rates can also allow investors to purchase bonds offering higher income than was available when rates were extremely low.
For retirees and income-oriented investors, that can make high-quality fixed income an increasingly important component of a diversified portfolio.
The key is looking beyond today's rate and considering maturity, credit quality, duration, liquidity, and how the bonds fit into your overall income strategy.
What About Mortgage Rates?
This is where there is often confusion.
A Federal Reserve rate change does not mean mortgage rates automatically move by the same amount.
Mortgage rates are influenced by longer-term bond yields, inflation expectations, economic growth, and investor expectations about where rates are headed.
As of September 17, the average 30-year fixed mortgage rate was 6.95%, according to Freddie Mac.
For homeowners who already have a low fixed-rate mortgage, a change in Federal Reserve policy doesn't change the rate on that existing loan.
For someone buying a home, moving, or considering refinancing, however, today's mortgage-rate environment can have a significant effect on the monthly payment and should be incorporated into the financial plan.
What Does It Mean for the Stock Market?
There isn't a simple rule that says higher rates are bad for stocks or lower rates are good for stocks.
Interest rates are only one part of the equation.
Corporate earnings, economic growth, inflation, employment, valuations, and expectations about the future all influence stock prices.
Different parts of the market can also respond differently to changing rates.
That's one reason we don't believe in rebuilding a long-term portfolio every time the Federal Reserve meets.
Instead, we focus on diversification and maintaining an appropriate mix of equities, fixed income, and short-term investments based on each client's goals.
Will Rates Go Back Down?
Nobody knows exactly where interest rates will be six months or a year from now.
Even Federal Reserve projections are projections not promises.
Trying to position an entire portfolio around predicting the next interest-rate move can be just another form of market timing.
A better question is:
Is my financial plan prepared for different interest-rate environments?
That's where planning becomes important.
What Should You Be Doing?
For most investors, an interest-rate change isn't a reason to make a dramatic financial move.
It is a reason to review your strategy.
How much cash are you holding? Are you getting an appropriate return on that cash? Does your fixed-income allocation still make sense? Are you taking more investment risk than necessary to generate the income you need? If you're considering a major purchase or mortgage, how do today's borrowing costs affect the decision?
For retirees, we also want to make sure enough money is available for near-term income needs without losing sight of the growth needed for a retirement that could last decades.
Keep the Rate Headlines in Perspective
Interest rates matter, but they're one part of a much larger financial picture.
Rather than trying to predict every Federal Reserve decision, we believe in building financial plans and portfolios designed to adapt as markets, rates, and life circumstances change.
If you have questions about what today's interest rates mean for your cash, investments, retirement income, or overall financial plan, I'm happy to review it with you.
Use my scheduling link to book a time that works for you.