The Federal Reserve (Fed) has made significant interest rate hikes in 2022 in an effort to combat record-high inflation. And analysts expect even more increases before the year is over. It is estimated the median federal funds rate will reach 3.4% by the end of 2022.1
What does this mean to you and your finances? When interest rates are on the rise, it can impact more than just borrowing money. While Fed rate increases may not have a huge direct impact on the stock markets, it is still worth checking in on your overall financial strategy to look for any opportunities for improvement.
Here are some areas investors may want to pay attention to
in a high-interest rate environment:
It is going to get more expensive to have debt. As the Fed increases its borrowing costs to financial institutions, these institutions will pass on the higher rates to consumers. Now is the time to evaluate what liability you are carrying. Those variable interest rate loans or credit cards are going to shift to higher rates as a result. You can plan to get your loans paid off or converted to fixed-rate loans. However, make a thorough evaluation because refinancing isn’t always worth the savings overall.
Just like other investments such as stocks, bonds have inherent risk. Bonds are very sensitive to changes in interest rates. As Fed rates increase, the value of existing bonds immediately declines. This is why it is a good idea to evaluate bond duration to minimize the impact of value decline as interest rates rise. Many investors have bonds as part of their investment strategy. The percentage of their portfolio dedicated to bonds is based on a variety of factors, such as their risk tolerance. There are a wide variety of bonds available, and each has its own characteristics and levels of risk that can impact your overall portfolio.
We will see the annual percentage yield (APR) finally go up in savings accounts. This probably won’t happen overnight, but we will start to see a trickle of banks increasing the rate they pay on savings accounts, money market accounts, and CDs. The national average rate on savings accounts is only 0.10% according to the FDIC, but there are much higher offers if you find the right institution.
Looking for opportunity
Markets are constantly changing, which means you may need to change up your investments. This could be a great time to look for opportunities in the current landscape. Work with your financial advisor to see how they recommend you clean up your portfolio or rebalance it. It could be a good time to focus on tax efficiency opportunities or to consider a Roth conversion.
Work with a financial advisor to gain guidance on a strategy for your short-term and long-term goals. Capital Financial Solutions has experienced professionals who are happy to talk with you about your unique situation. We believe the information we provide will better enable you to identify your goals and make sound decisions to help reach them.
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