What the Federal Reserve raising interest rates means for investors (2024)

FAQs

What the Federal Reserve raising interest rates means for investors? ›

Higher interest rates can make borrowing money more expensive for consumers and businesses, while also potentially making it harder to get approved for loans. On the positive side, higher interest rates can benefit savers as banks increase yields to attract more deposits.

Some potential suggestions for bond investors in a rising interest rate and rising inflation environment include: Invest in shorter-duration bond mutual funds and ETFs. Shorter-duration funds will be less susceptible to rising interest rates than longer-duration funds. Ladder the maturities of individual bonds.

When a Fed rate hike happens, what does it mean for you? “Expect to pay more on the interest charges from your credit card company, and auto loans and mortgages will also become more expensive,” says Ken Tumin, LendingTree's senior banking industry analyst.

When the Fed increases the federal funds rate, it typically pushes interest rates higher overall, which makes it more expensive for businesses and individuals to borrow. The higher rates also promote saving.

As a general rule of thumb, when the Federal Reserve cuts interest rates, it causes the stock market to go up; when the Federal Reserve raises interest rates, it causes the stock market to go down. But there is no guarantee as to how the market will react to any given interest rate change.

With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.

A higher interest rate environment can present challenges for the economy, which may slow business activity. This could potentially result in lower revenues and earnings for a corporation, which could be reflected in a lower stock price.

Higher interest rates tend to negatively affect earnings and stock prices (often with the exception of the financial sector). Changes in the interest rate tend to impact the stock market quickly but often have a lagged effect on other key economic sectors such as mortgages and auto loans.

Higher interest rates can make borrowing money more expensive for consumers and businesses, while also potentially making it harder to get approved for loans. On the positive side, higher interest rates can benefit savers as banks increase yields to attract more deposits.

A rise in interest rates automatically boosts a bank's earnings. It increases the amount of money that the bank earns by lending out its cash on hand at short-term interest rates.

Who makes money when Fed raises interest rates? ›

Banks generally raise the interest paid on deposits when the Fed raises interest rates. These accounts are one way banks bring in funds that they can then lend out. Generally the interest rate on the loans is higher than what they pay on savings accounts, so they make money on the spread.

Over the last two decades, gold has consistently delivered positive returns during periods of interest rate cuts. Gold and interest rates typically have an inverse relationship and price tends to rise when interest rates fall and go down when they increase, Anuj Gupta, Head Commodity & Currency, HDFC Securities said.

Cost of borrowing: Higher interest rates increase the cost of borrowing for companies, which can reduce their profits and future cash flows. Lower profits can lead to lower stock valuations and stock prices. Consumer spending: Higher interest rates can discourage consumer spending as borrowing becomes more expensive.

You can capitalize on higher rates by purchasing real estate and selling off unneeded assets. Short-term and floating-rate bonds are also suitable investments during rising rates as they reduce portfolio volatility. Hedge your bets by investing in inflation-proof investments and instruments with credit-based yields.

When interest rates rise, bank stocks can go up because banks can earn more money from lending. However, rising interest rates may also lead to decreased consumer spending, resulting in lower loan originations. Individual performance will vary by bank stock.

Cons of the Federal Reserve

The Federal Reserve operates independently of the U.S. government, and its monetary policy decisions are not approved by Congress or the U.S. president. This independence helps the Fed operate free of political pressure, but it also limits the Fed's accountability.

You can capitalize on higher rates by purchasing real estate and selling off unneeded assets. Short-term and floating-rate bonds are also suitable investments during rising rates as they reduce portfolio volatility. Hedge your bets by investing in inflation-proof investments and instruments with credit-based yields.

Higher real interest rates can increase borrowing costs. This can cause people to curb spending and borrowing. This, in turn, can slow economic activity. Of course, higher real interest rates can also improve the returns people may earn on their investments.

Pros. Home prices and interest rates could keep rising, so while rates are higher than they were a few years ago, you might get a better deal now than if you wait. With fewer buyers shopping right now due to higher costs of borrowing, you might have more negotiating power.