As most people know by now, Federal Reserve Chairperson Janet Yellen has been raising interest rates and will probably continue to do so. What does that mean for the average consumer and investor?
The Federal Reserve, the central bank of the U.S. has a number of tools they can employ to help stimulate economic growth and control inflation. One of the tools commonly used is the Federal Funds rate, or the interest rate financial institutions charge each other for borrowing funds. This sets a base rate of sorts for the consumer. The Federal Reserve dropped interest rates during the financial crises to stimulate growth through bank lending activities. The idea being cheap money would encourage borrowing. On the flip side, savers were punished with low rates of return.
We have finally seen some progress in the economy and now the Federal Reserve has started moving rates upward, as they meet their goals of full employment and desired level of inflation. This will make borrowing a bit more costly and increase yields for savers to a degree. This is seen as a positive sign for the economy yet not without some challenges.
As rates increase, or “normalize” savers will benefit, borrowers will pay more, and investors will have to review and potentially adjust their fixed income strategies. Strategies investors can employ include changing maturities and durations on portfolios, utilizing more interest sensitive credit, bank loan or floating rate loans or even tactical repositioning. If you’d like some ideas on how rising rates can impact your investment portfolio, and some tactics to employ, schedule some time with your financial advisor.
Mark Nabell, Managing Partner, Nabell Winslow Investments and Wealth Management
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