What the Fed Rate Hikes Means for Investors
In December 2022, the world saw temperatures fall and interest rates rise. In fact, the fed rate hike rose 50 basis points, which is the highest increase within the past 15 years. This interest rate increase will undoubtedly impact both short-term and long-term investment plans.
At the same time, it opens the door to new investment strategies and opportunities that may have otherwise gone overlooked. In this article, we’re going to explore what the fed rate hike is, the investment vehicles worth considering, and what these changes mean for investors like you.
What Happens When The Fed Raises Interest Rates?
Before we get into the effects of the Fed rate hike, it’s important to note what “The Fed” is. The shortened word refers to The Federal Reserve, which is the central banking system of the United States. The primary function of the Federal Reserve is to ensure that the country has a stable financial system.
To do so, the Fed has control over national monetary policy and influences interest rates, to name a few of its responsibilities and power. So, the Fed has the ability to increase or decrease interest rates, which then sets the standard for financial institutions nationally.
When the Fed decides to raise interest rates, the cost of credit throughout the economy increases as a result since interest rates can be thought of as the “cost of borrowing.” This means that the rising interest rates make loans more “expensive” for everyone, including business owners and consumers alike. And so, interest payments start adding up.
As a result, most businesses and consumers will cut back on spending, which naturally affects the overall economy and its growth.
Typically, when interest rate increases take place, here’s what you can expect to happen to these common types of investments:
Stocks: Higher interest rates have a negative impact on the stock market. Since the repercussions of the fed rate hike results in making borrowing money more expensive, companies have less incentive to borrow money. As such, their expected earnings tend to rise at a slower rate, which makes stock investments less attractive for investors ( who would rather turn to the bond market or other investment opportunities, like real estate).
Buy or Invest in Real Estate: Real estate prices rise or sometimes even outperform interest rates. Buying Real Estate Investment Trusts (REITs) or investing in real estate is a good way to earn profits if you plan ahead and purchase the right type of investment. Additionally, there are real estate investment opportunities like Short Notes (provided by Connect Invest, which we will touch on again shortly).
Invest in Cash-Rich Companies: If you’re looking for a company to invest in, this may be a good idea because cash-rich companies earn more from cash reserves and benefit from rising interest rates. You should look for a low debt-to-equity ratio or companies whose balance sheets are largely cash.
Sell Assets: If you own property you may not need or other assets, you can profit from selling off unneeded assets right before the interest rates begin to increase.
Commodities: Commodities such as metals, oil and gas, and agricultural goods can be a hedge against inflation when the fed interest rates rise.
As you can see, when the interest rates rise, you’re not stuck in a pigeon hole. Instead, you can think through what types of investments make sense for your portfolio and your circumstances. In some cases, rebalancing your portfolio by buying and selling assets during fed rate hikes can help to increase the upside of your investments.
How Does Raising Interest Rates Help Inflation?
In layman's terms, inflation is the rate of increase in prices over a given period of time, which is influenced by the supply and demand of goods. When there is an increase in consumer demand for goods and services, the Fed usually increases interest rates in order to help control inflation.
So, how does raising interest rates help control inflation?
Raising interest rates can help control inflation by helping to slow consumer demand and consumer spending to help keep prices from rising too rapidly. As interest rates go up, consumers tend to purchase less expensive items such as homes, cars, and electronics because of the higher cost of borrowing. Thus, the demand decreases, thereby slowing inflation.
Investment Considerations When Interest Rates Rise
With higher interest rates, you may feel like a deer in headlights with questions about what to do next. The good news is that stocks aren’t the only investment option available, so you’re never stuck with only potential losses.
There are ample opportunities for investors when rates go up, as well as best practices. Take a look:
- Savings Account: Maximize your savings account interest rate by putting in some of your emergency cash into a high interest savings account.
- Bonds: Choose to diversify your portfolio with bonds. Bond prices have an inverse relationship with interest rates, meaning when the interest rates increase, the prices of bonds decrease, and when interest rates go down, then the bond prices go up.
- Pay off debt: Things such as home equity lines of credit, private student loans, or credit cards typically have variable interest rates. So with a fed rate increase, the interest rates on these would increase, too. Remember, the cost of borrowing (debt) becomes more expensive, so it’s as good a time as ever to start lowering what you owe, if you can.
- Refinance loans: Refinancing your current loans, such as student loans or a mortgage, can help you lower your interest rate to pay less interest over a period of time.
- Short Notes: Real estate short notes are a way for anyone to invest in real estate, even without access to high capital. Real estate short notes are a low-cost method of investing for accredited investors that result in passive income. Put simply, your investment helps to fund a mortgage for a homebuyer or landlord, who then pays interest as a return to you (rather than a bank).
As an investor, regardless of interest rates, it’s always important to focus on having a diversified portfolio in an effort to limit losses and maximize gains.
Fed Rate Hike and Investments: What to Remember
To make wise investment decisions, it’s good to keep in mind what happens when interest rates are lowered and when interest rates rise, and how your investments can be impacted.
Here’s a quick guide to keep in mind.
When interest rates decrease:
- Bond prices rise
- Potential stock market gains
- Lower interest rates on savings accounts and CDs
- Commodity prices rise
- Mortgage rates fall
When interest rates rise:
- Bond prices fall
- Potential stock market losses
- Higher interest rates on savings accounts and CDs
- Commodity prices fall
- Mortgage rates rise
A Unique Investment Opportunity
If you’re looking to earn higher interest rates, there are impressive investment pathways out there that you may want to consider.
Connect Invest provides you with the opportunity to invest in a diverse portfolio of real estate short notes. Your investment pools together with others to fund residential and commercial real estate projects (and the best part is, you have no overhead, no fees, and maintain liquidity).
Due to the fed interest rate hike, Connect Invest is adjusting its annual rate of return on its short notes investments (which is a benefit for investors like you). They’re set to be:
- 6 months = 7.5%
- 12 months = 8.0%
- 24 months = 9.0%
Connect Invest short notes provide competitive interest rates when compared to bank products like CDs, savings, and checking accounts. Funds from short note investments are used for purchasing first-position collateralized notes of various real estate projects that are managed internally, so you can continue going about your business without having to worry about your money. Learn more about how Connect Invest works and get started here.
The Bottom Line
Despite the historical Fed rate hike, there are still plenty of ways for you to invest your money wisely. Whether you are a first-time investor, a seasoned investor, or someone looking to invest without access to high capital, many options are available for both short-term and long-term investment strategies.
With Connect Invest, you can become a real estate investor, earn passive income, and diversify your portfolio all at once. Ready to get started? Join fellow investors by signing up.