Will J. from Texarkana, AR asks: Hello Mitch, I would love to hear your thoughts on interest rates going up. I realize the Federal Reserve’s move was expected, but am still wondering if higher rates will be a negative for stocks and the economy. Thank you.
Mitch’s Response:
Thanks for writing. The Federal Reserve’s decision to raise its benchmark federal-funds rate by a quarter percentage point was the big news last week that wasn’t news at all – as you point out, the rate hike was widely expected, and I would argue already baked into stock prices. After all, stocks rallied on the day of the news!1
I think it is important for investors to remember that interest rates are coming off the zero bound, and the Fed’s recent hike only moves the target range to 0.25% – 0.5%. Generally speaking, and historically speaking, these are still very low rates and represent accommodative monetary policy. And even if the Fed carries through with several rate hikes this year, the fed-funds rate will probably finish 2022 at around 2% – again, still quite accommodative by historical standards.
What Happens to Your Finances When Life Changes?
Life is full of surprises…and so is the market! Some changes are good and some can be painful. For example, interest rates are rising. At the same time, some investors may be experiencing life changes such as selling a family home, retiring, or even starting a new job. What do these life changes mean for your financial future?
I have put together a free guide to help you be ready for any life change, both anticipated and unexpected. Some issues this guide explores include the emotional effects of receiving an inheritance, adjusting to a new financial reality after divorce, and how to work through these changes.
If you have $500,000 or more to invest, get our guide, Financial Situations Change: Here’s How to Protect Yourself When They Do2” which looks at some common life changes and their financial implications.
To be fair, the Fed is removing accommodation in other areas, such as ending its QE program last week and also planning to trim its $9 trillion balance sheet in the first half of this year. But I see these moves largely as normalizing monetary policy, which I think the U.S. economy is ready to absorb. Ending the crisis-era policies and moving the fed-funds rate to 2% is appropriate, in my view, not a sign of aggressive monetary tightening that could have deleterious effects on the stock market or the economy in the near- to medium-term.
History offers us a bit of perspective here. The previous two interest rate hiking cycles took place from 2004 to 2006, during which the Fed raised rates 17 times in succession. In the next economic expansion, the Fed raised rates nine times from 2015 to 2018. Here’s the key thing to remember: the stock market went up significantly, and the U.S. economy grew, during both periods.
I think at least in 2022 we will see a similar outcome, with the Fed raising rates while the U.S. economy continues to expand.
As for what this means for savers and investors, I don’t think savings rates are bound to go up materially this year. Banks are already flush with deposits and do not need to raise rates to incentivize more. Mortgage rates will likely continue to tick higher, however, and just last week crossed 4%. Expect rates to keep going up.
The stock market is likely to be less impacted by rate hikes, in my view, as rising interest rates are already expected. I think we could see continued volatility in high valuation names, but overall, I would not expect much of an impact on how stocks perform for the year. That depends on economic growth and earnings, which I continue to believe will be better than most people expect.
What can you do to protect your investments in the meantime? Many events could take place in your life within the next year. So, to help you prepare for future life changes, I have put together a free guide that explores situations, like the emotional effects of receiving an inheritance, adjusting to a new financial reality after divorce, and how to work through these changes.
If you have $500,000 or more to invest, get our guide, Financial Situations Change: Here’s How to Protect Yourself When They Do3” which looks at some common life changes and their financial implications.
Disclosure