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What's the Risk of Rising Interest Rates?

What's the Risk of Rising Interest Rates?

September 18, 2018
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In the wake of the 2008-09 financial crisis, the Federal Reserve Bank cut rates to near zero and left them there for almost seven years. Since December 2015, the Fed has embarked on a campaign to normalize interest rates. 
 
In this process, they have raised interest rates seven times so far. The Fed is widely expected to raise interest rates again later this month, and most economic pundits believe that there is a better than 50/50 probability that they will raise rates an additional time in December.
 
From a financial planning and investment management process, this is important for several reasons. First, as interest rates rise, debt servicing costs could potentially rise in tandem. You should be paying particular attention to any debt that you have that has a floating interest-rate. This is especially true of home equity credit lines, credit cards and student loans.
 
Secondly, we know that high-quality, longer maturity bonds tend to see their prices move inversely with interest rates. This means that as interest rates continue to rise, bond prices could potentially fall. While bonds are an important anchor to manage risk and volatility, as well as create income in a portfolio, we need to pay attention to the types of interest-rate risk associated with this in your portfolio.
 
Finally, short term rates have finally risen enough that for the first time in nearly a decade, there are options for investing and managing short term cash assets. Financial repression had kept interest rates on savings accounts, CDs and short-term bonds very low for a long period of time, giving investors little return on these assets. This has finally started to change for the good for savers.
 
Please know that we pay enormous attention to the economy, the markets and the Fed. If you have questions or concerns about how these issues will affect you, your investments and your retirement picture, please reach out to us so that we can have a conversation. Good information leads to good decisions as we all "Move Life Forward" together.