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n an effort to help combat surging inflation, you more than likely have heard the Fed’s plan to begin increasing interest rates. Many have differing views on how this will affect the current economic climate as well as market and bond returns, but it doesn’t necessarily signal bad news.READ THE ARTICLE
A brief background: Simply put, interest rates are essentially market prices. As this article states, they “measure the cost of capital” and “the market rate that a borrower pays to borrow money”. That being said, it’s important to note that raising interest rates does not warrant slow economic growth or poor returns, and because interest rates are swayed by many varying factors, a period in which they are hiked can in some cases be positive.
The reality: Throughout times of economic expansion, a rise for capital demand can also cause interest rates to rise, and as a result, increased expected profits from that demand can make investments more profitable. While the market does not have a direct correlation to these increases, different bonds can be affected based on changes in demand and supply.
What now? Raising interest rates in today’s environment creates such immediate response because of everything the economy has already experienced thus far: pandemic-induced disruption, large government spending and an increase in money supply. It is now the Fed’s challenge to combat inflation and signal interest rates to increase in a consistent manner with economic recovery.
My two cents: You should understand how economic factors could impact your portfolio prior to making any snap judgments based on fear-based headlines. Always have a plan that considers the best and prepares for the worst.