Keen Interest

Strategies for understanding and navigating the nuances of a high-interest-rate environment.

When the Federal Reserve formalized its anticipated rate hike with the latest quarter-point increase in its federal-funds rate, it was the 10th increase in the last 14 months. While the general expectation is that this will be the last increase for some time, the benchmark rate is now between 5% and 5.25%, dramatically higher than the record near-zero rates as recently as March 2022.

Regardless of whether we see additional rate hikes in the future, consumers are facing different economic conditions today than they were in the past. Higher rates make it more difficult for consumers to borrow money, driving down overall lending volume. And those that can still borrow money will be paying more for it. We generally see credit tightening during high-interest-rate periods, with card companies becoming stingier with limits and sometimes raising rates. Higher rates are particularly problematic for certain groups of consumers, such as first-time homebuyers. Because home prices haven’t come down and the cost of money has gone up, the overall expense of buying a home today is steeper than at any other time in recent memory.

In a high-interest-rate environment, it is crucial to be mindful of the nature and size of your debt obligations. Variable rate debt, which is subject to increase with interest rate hikes, is especially concerning. Whether it’s HELOC loans, credit card and consumer debt, or adjustable-rate mortgages (ARMs), take the time to evaluate your debt and assess your exposure. If necessary, talk to a financial planning professional to consider your options if your debt is subject to change significantly due to higher interest rates.

On the money management side, investors will find new and different opportunities to earn more interest. Rising interest rates tend to depress stock prices (at least in the short term) while making fixed-income investments like bonds more attractive. In the current environment, fixed income can offer a chance to invest in higher-yielding assets. Right now, for example, a one-year Treasury bill (T-bill) is paying an investor a return of 4.7%. By comparison, in 2021, that same T-bill was paying 0.1%. A 5-year T-bill pays 3.5%. Corporate bonds pay even higher yields.

Generally speaking, your priorities during higher rate environments should include the following:

• Explore higher-yielding fixed-income investment opportunities.
• Put your cash to work. If you’re holding onto cash in an amount greater than six months of projected spending, consider short- and medium-term investments with a predictable rate of return.
• Avoid adjustable-rate mortgages and any consumer-related interest (such as credit card debt) subject to variable rate fluctuations.
• Stay informed and engaged and be willing to change your spending and borrowing habits if necessary. Factor the higher expense of borrowing into your budgeting and consider putting off projects that might require variable debt. Exercise discipline and prudence, setting a budget and sticking to it.
• As always, when making investment decisions, remember to look downstream and consider the long-term health of your portfolio. Ultimately, higher rates are a necessary correction to get us back to a normal rate of inflation, and it is nearly impossible to predict how quickly the rates will rise or fall from here. So, stick to the basics of prudent financial planning, regardless of the higher rates.
• Consult a trusted financial advisor who can optimize your cash management approach and help make sure your assets are working for you.

While coverage of the May 3^rd rate hike was quick to point out that the Fed has hinted that they don’t anticipate additional rate increases anytime soon, that’s not a guarantee. Be thoughtful and work closely with your financial advisor to minimize your exposure, optimize your investment approach, and move forward confidently and clearly.

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Advisory services offered through The Nemes Rush Group LLC. Securities offered through J. Alden Associates, Inc., member FINRA/SIPC. The Nemes Rush Group LLC and J. Alden Associates Inc. are not affiliated. The information presented is for informational purposes only. Please consult your tax professional to determine the tax effects on your personal situation prior to making any investment.