Rising Interest Rates and High Inflation – How Will You Respond?

The Federal Reserve voted to increase interest rates for the first time since 2018 and has several more rate hikes planned for this year.[1] Rising interest rates can have significant effects on the economy and your finances. Between a volatile market, high inflation, and rising interest rates, you need to make sure your financial plan is ready to respond.

The Federal Reserve Raising Interest Rates for the First Time Since 2018

The Federal Reserve recently voted to increase interest rates for the first time since 2018. They raised the benchmark federal funds rate by a quarter percentage point to a range between 0.25% and 0.5%. The federal funds rate can influence other consumer and business borrowing costs throughout the economy, including rates of mortgages, credit cards, savings accounts, car loans, and corporate debt. The Fed anticipates six more increases by the end of the year to almost 2%, the most aggressive pace in over 15 years.[2]

What Do Rising Interest Rates Mean for You?

Rising interest rates can sometimes lead to market volatility. The market tends to respond poorly to higher borrowing costs because it makes the cost of doing business more expensive.[3] Higher interest rates mean paying more interest on a mortgage, car loan, or any other loan. It also means that savings accounts, CDs, and fixed annuities may pay more in interest. The market prices of existing bonds immediately decline after a rate hike because new bonds coming onto the market will offer higher interest payments.[4]

Will This Tame Inflation?

Inflation is running at its highest level in 40 years, with the latest measure of 8.5% year-over-year. The Federal Reserve is raising interest rates to combat inflation, but no one knows the effect it will have. Americans are paying more at the pump and are seeing overall higher prices. According to a recent study, the average American household will pay almost $2,000 more in gas and $1,000 more on food in 2022.[5] Consider the effect on your nest egg if your savings account and any CDs were still earning less than the inflation rate.

Why You Need a Plan

Since the pandemic, we’ve seen that it’s impossible to predict the future and that it’s important to be prepared for whatever the future could throw at us. We can help you create a financial strategy that takes rising interest rates, inflation, and market volatility into account. It’s time to reconsider your risk tolerance as you near and enter retirement. Sign up for your initial complimentary meeting with us to discuss where you want to go and how we can help you get there.