How do interest rates affect investments?

The Federal Reserve (Fed) has a dual mandate: to promote maximum employment and price stability. One of the ways they do this is through adjusting short-term interest rates.

When the economy is growing quickly, the Fed may become concerned about inflation. In this case, the Fed can pump the breaks and raise interest rates to make borrowing more expensive and, in turn, dampen spending.

When interest rates rise:

1) Bond prices fall - Interest rates and bonds have an inverse relationship

2) Potential stock market losses - There’s no guarantee that a rate hike will negatively impact stocks. Typically, rising interest rates occur during periods of economic strength. In this scenario, increased rates often coincide with a bull market. With a balance of stocks and bonds, your portfolio may be better positioned to maintain more stability despite an interest rate increase.

3) Higher interest rates on savings accounts and CDs

4) Commodity prices fall

5) Mortgage rates rise

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