After slashing rates to record lows following the 2008 global financial crisis, the Federal Reserve has been slowly raising interest rates as the economy recovers. As the Fed increases rates, it has a ripple effect that can impact every part of your life.
For savers, the rise of interest rates means higher payouts on savings accounts and a greater opportunity to grow your wealth. However, borrowers may face higher debt payments, particularly on mortgages. Inflation, which has been climbing at a rapid pace, can also make purchases more expensive. This is why some people choose to refinance their loans before rates increase, to lock in lower rates.
When interest rates rise, stocks tend to decline as investors anticipate that higher borrowing costs will dampen earnings. This is most pronounced for companies that depend on economic growth, such as consumer discretionary and industrial stocks. In addition, higher interest rates can affect the value of the dollar by making it more expensive to purchase foreign goods.
Although the Fed’s rate hike and plan to shrink its balance sheet take powerful aim at surging inflation, multiple economists have warned that the central bank could over-tighten the economy, triggering a recession. With this in mind, consider working with a financial advisor as you position your investments and savings for future rate hikes. This may include strategies that diversify your portfolio with foreign assets or putting some of your savings into short-term certificates of deposit to earn healthier returns.