It would be hard to miss the recent news about yet another 2022 Federal Reserve interest rate hike designed to curb ongoing high inflation and a weakening global economy. Also called a federal funds rate, this is the interest rate banks and credit unions charge each other for overnight loans, but it impacts consumers. The most recent September rate hike of 0.75% impacts Americans in a variety of ways. This recent rate hike to 3.25% is the highest since 2008. While rate hikes are usually set a 25-point increments, this unique 0.75% hike is expected to handle today’s fast rate of inflation. This increase was benchmarked to be only 2% this year, while it is instead already beyond 8.3%!
Impact on Consumers
Increased interest rates discourage consumer spending, which is expected to reduce inflation on the prices of goods and services. However, the challenge for most Americans is manifested in regular increased monthly debt via credit cards, auto and mortgage financing, CD and savings rates, IRAs, stock markets, and variable rate loans, to name a few.
Impact on the Stock Markets
The interest rate hike has a serious immediate impact on the stock markets, especially such a large hike, primarily because borrowing becomes more expensive for both individuals and for businesses. Higher interest rates often negatively impact earnings and stock prices (except in the financial sector). Discount rates used in future cash flow increase, and investors are often forced to consider shorter-term bonds or alternative assets.
Impact on Your IRA
Unfortunately, retirement plans such as your 401(k) plan are also subject to rising interest rates. While this savings plan fluctuates with the market, the impact of rising interest rates is much greater depending on your unique investment portfolio. There are many funds you may have invested in. Most investors’ 401(k) plans consist of stocks and bonds. Stocks are usually more aggressive while bonds are considered more conservative. Holding both may be advantageous since the investments along with the risks are set to maximize returns. Keep in mind that bonds take a higher hit when interest rates rise; stocks tend to perform well when interest rates fall. Still, investor losses due to inflation are usually quite significant and could sweep away thousands of personal dollars in retiree benefits.
Impact on the Economy
While the economic impact from higher interest rates generally takes a longer period than a few months, rising interest rates are detrimental to a growing economy. Rate hikes are used to curb inflation in a slowing economy, but the economy tends to get worse before it gets better. Overall, when businesses borrow less money for capital equipment replacements, new capital equipment, factory expansions, and new factories, the economic impact can be severe and long-lasting. Then, the entire nation’s productive capacity decreases and the nation’s long-term economic growth decreases; thus, we find ourselves in a recession—a significant decline in nationwide economic activity that usually lasts for months and sometimes years. A recession is recognized when the nation’s economy has negative gross domestic product, decreasing retail sales, and rising unemployment levels.
What Happens to Gold?
Seasoned investors often agree that the time period after increased interest rates is the most important period for buying gold. At a time like this, gold tends to gain strength as investors seek safe-haven assets while the market fluctuates. It is a time when asset holders often to seek alternatives such as gold. Why you ask?
Gold:
- Has an advantage over treasury bills
- Performs to supplement your portfolio’s liquid asset holdings
- Is a proven diversifier
- Is an anonymous asset, independent of governmental policy
- Serves as international currency that is free from national boundaries
- Is shown as a successful diversifier for any portfolio
- Is known as a safe haven when economic turmoil is present
At Reagan Gold Group (RGG), we recommend that gold and silver make up about 10-20% of your asset portfolio. We believe gold is a hedge against raging inflation and prevails during geopolitical and economic woes. Most everyone today can agree on one thing: we are living in the most uncertain times of the century. On the other hand, rising interest rates may be a good time to buy gold. You can gain peace of mind at RGG. Contact an agent now to understand the best approach during this time of great national unrest.
References:
https://www.kitco.com/commentaries/2022-06-15/The-gold-market-is-getting-ready-for-another-interest-rate-hike.html
https://www.investopedia.com/investing/how-interest-rates-affect-stock-market/
