What counts is how your money is invested now in anticipation of rate hikes.
At their recent March meeting, the Federal Reserve moved its fed funds target rate from near zero to a range of 0.25% to 0.50%. It was the first rate hike since 2018.
But the Fed did three more things, including:
Releasing an updated forecast which showed that we can expect the Fed to raise rates about 7 times in 2022.
Downgrading their forecast for economic growth, while upwardly revising inflation projections.
Suggesting that it would shift its monetary policy from accommodative to neutral and then to slightly restrictive before the end of 2023.
And Wall Street seemed ok with this approach and as soon as the Fed’s meetings concluded, markets jumped.
The Fed, in their own words
“Indicators of economic activity and employment have continued to strengthen. Job gains have been strong in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.
The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
The Fed was not unanimous
By its own metrics, however, it was becoming
increasingly difficult for the Fed to forestall a rate
increase at least in the range of 0.25%.
In fact, buried in a footnote of the Fed’s statement
was this nugget: “Voting against this action was James Bullard, who
preferred at this meeting to raise the target range for
the federal funds rate by 0.5 percentage points to 1/2
to 3/4 percent.”
Positioning a portfolio for rate hikes
In the market’s grand scheme, what do additional rate
hikes mean to the average investor?
Most financial advisors (and the authors of “Invest
with the Fed: Maximizing Portfolio Performance by
Following Federal Reserve Policy”) agree that, for
average investors, what counts is how their money is
invested now in anticipation of a rate hike.
A good strategy most advisors start with is to hold
onto long-term equity positions if nothing has
fundamentally changed regarding one’s long-term
objectives. A sudden drop in prices, though, is not
necessarily a negative for those long-term investors
who favor buying more shares on a downturn at
opportunistic lower prices. Historically, modestly rising
rates have also correlated with higher price/earnings
ratios, which is a key gauge for evaluating near-term stock
However, if a person could not withstand a 5% to 10%
correction over the short-term, the time to liquidate
shares is probably now, the authors of “Invest with the
Fed” maintain. The best time to evaluate one’s ability
to handle risk is prior to a rate hike, not after.
For income-minded investors, think shorter durations
For bond investors who need to spend the income
from their investments, on the other hand, the time
may be right for shortening durations. If rates
gradually increase, downward pressure on bond
prices will inevitably ratchet up too. For fixed income
investors who plan to hold onto their bonds until they
mature, there would be no need to redeploy assets to
the shorter-end of the duration spectrum.
For investors with a bit of gumption, a rising rate
environment can be supportive for a diversification
move that includes commodities, precious metals and
other inflation-resistant assets.
Talk to your Synovus financial advisor
Investors need not ponder their rate hike concerns
alone. In preparation for gradually rising rates, the
time is probably right to meet with your Synovus financial advisor
to review current allocations to make sure that
holdings are appropriately diversified and still reflect
your risk tolerance and financial goals.
Important disclosure information
Diversification does not ensure against loss.
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
You are about to leave the Synovus web site for a third-party site
Third-party sites aren't under our control, and we are not responsible for any of the content or additional links they contain. We don't endorse to guarantee the goods or information provided by third-party sites, and we're not responsible for any failures or inaccuracies. Third-party sites may contain less security and may have different privacy policies from ours.