April 29, 2016
Interest rates drive a number of the factors surrounding investing, from simple bank savings accounts to home mortgages. Today’s investors have fine-tuned their strategies to fit with the historic-low interest rates of the past seven years, but now that interest rates are on the rise again, it’s prime time for re-evaluation.
The pace of the rate increases is expected to be modest, with the Federal Reserve (Fed) funds target reaching just 1 percent or less by the end of 2016 — and even that level of growth is not a guarantee, says Robert Haworth, CFA and Senior Investment Strategist for U.S. Bank Wealth Management.
Haworth explains that if inflation expectations erode, wage growth fails to materialize or economic activity slows down, the Fed could defer rate increases until improvements are seen. It’s also important to note that Fed rate actions tend to have little influence on long-term interest rates, except through inflation expectations.
This is the primary reason the Fed engaged in quantitative easing policies — to reduce long-term interest rates. “This is not a replay of 2008, when the economy was soft and U.S. stocks fell by a third from the peak, and some international markets saw 50 percent losses,” Haworth says. “This is a different environment.”
The Fed has begun the first cycle of interest rate increases in a decade, which might be a bit of a shock for investors who’ve grown accustomed to an incredibly low interest rate environment — it’s been at or near zero percent since 2008.