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Interest rates

Fortune 500 Employees: What Does Rising Interest Rates Mean for Your Money?

The Federal Open Market Committee (FOMC) of the Federal Reserve raised the benchmark federal funds rate by 0.25 percentage points to a target range of 0.25 to 0.50% on March 16, 2022. The FOMC expects to implement a series of rate hikes over the next two years in an effort to combat elevated inflation.1

Along with the announcement of the current increase, the FOMC released economic projections that imply six additional 0.25 percentage point increases in 2022, followed by three or four additional increases in 2023.2 Fortune 500 employees and retirees must bear in mind that these are merely projections based on current conditions, and that they may not come to pass. Nonetheless, they paint a useful picture of the possible trajectory of U.S. interest rates for residents of Austin, Texas.

What is the federal funds rate?
The federal funds rate is the interest rate at which banks lend overnight funds to one another to sustain legally required reserves within the Federal Reserve System. The Federal Open Market Committee (FOMC) establishes a target range, typically a 0.25 percent spread, and then establishes two specific rates that function as a floor and a ceiling to push the fund's rate into the target range. The rate may fluctuate marginally from day to day, but it is typically within the range of the target.

Although the federal funds rate is an internal rate of the Federal Reserve System, it functions as a benchmark for many banks' short-term rates and can influence longer-term rates.

Why does the Fed adjust the federal funds rate?
The Federal Reserve and the FOMC have a dual mandate to promote maximum employment and price stability through their monetary policies. The Federal Reserve's primary instrument for influencing economic growth and inflation is the federal funds rate.

The FOMC reduces the federal funds rate to stimulate the economy by making it simpler for businesses and consumers to borrow money, and raises the rate to combat inflation by increasing the cost of borrowing. In March 2020, when the pandemic devastated the U.S. economy, the Committee swiftly lowered the interest rate to 0.00%–0.25% and maintained it there for two years as the economy recovered.

The FOMC has established a 2% annual inflation target as congruent with robust economic expansion. The Committee deemed it appropriate for inflation to remain above 2% for a period of time in order to compensate for the protracted period when it was below 2% and to give the economy additional time to grow in a low-rate environment. The Fed was compelled to change course and tighten monetary policy as a result of the persistently rising inflation levels over the past year.

How will consumer interest rates be affected?
This is a query that Fortune 500 employees and retirees have been asking. The prime rate, which is charged by commercial banks to their best customers, is directly attached to the federal funds rate and typically runs about 3 percentage points above it. Small-business loans, adjustable-rate mortgages, home-equity lines of credit, auto loans, credit cards, and other forms of consumer credit are frequently linked to the prime rate; therefore, the interest rates on these types of loans typically increase with the federal funds rate. These rates are not explicitly linked to the federal funds rate or prime rate. 

Despite the fact that rising interest rates make borrowing more expensive for consumers and businesses in areas such as Austin, Texas, Fortune 500 employees, retirees, and others seeking income may ultimately benefit from higher returns on savings accounts and certificates of deposit (CDs). Typically, banks increase rates charged on loans more rapidly than rates paid on deposits, but an extended series of rate increases should eventually reach depositors.

What about bond investments?
Changes in interest rates can have a wide-ranging impact on investments, but the impact is typically greater in the short term as markets acclimate to the new level.

When interest rates increase, existing bonds typically lose value. Simply put, investors employed at Fortune 500 prefer newer bonds with a higher interest rate to older bonds with a reduced rate. Bonds with longer maturities tend to be more volatile than those with shorter maturities, as investors may be reluctant to commit capital for an extended period if they anticipate future yield increases.

Bonds redeemed prior to maturity may be worth more or less than their original value. However, if a bond is held until maturity, the proprietor will receive the face value and interest, unless the issuer defaults. Therefore, rising interest rates should not impact the return on a bond held to maturity, but they may impact the price of a bond sold on the secondary market before maturity.

Although rising interest rates may have a negative impact on bonds you presently own and wish to sell, they may provide more attractive rates for future bond purchases.

The same inflation, interest rate, and credit risks that apply to the fundamental bonds also apply to bond funds. Consequently, a bond fund's performance can be negatively impacted by a decline in bond prices brought on by an increase in interest rates. However, as underlying bonds mature and are replaced by higher-yielding bonds in an environment of rising interest rates, the fund's yield and/or share price may increase over time.

How will the stock market react?
Equities may also be impacted by raising interest rates, albeit less directly than bonds. Stock prices are highly correlated with earnings growth, so even with higher interest rates, many corporations could benefit from a stronger economy. On the other hand, companies that rely heavily on financing will likely incur higher costs in the future, which could have a negative impact on their profitability.

The stock market reacted favorably to the initial rate hike and the projected path forward, but investors will be closely observing how the economy performs as interest rates adjust, as well as whether the increases are effective in taming inflation.3

The market may continue to react, either positively or negatively, to the government's inflation reports or the Federal Reserve's interest rate decisions, but any reaction is typically short-lived. Fortune 500 employees and retirees must always maintain a long-term perspective and make sensible investment decisions based on their individual financial objectives, time horizon, and risk tolerance.

The FDIC insures certificates of deposit (CDs) and bank savings accounts, which typically offer a fixed rate of return, up to $250,000 per depositor per insured institution. The return and principal value of equities and mutual funds fluctuate in response to market conditions. When sold, shares may be worth more or less than their initial price. Investments with the potential for higher returns also carry a greater degree of risk.

A prospectus is used to market investment funds. Before investing, Fortune 500 employees and retirees must thoroughly consider the fund's objectives, risks, fees, and expenses. You can obtain the prospectus, which contains this and other information about the investment company, from your financial advisor. Before deciding whether to invest, we would like to remind Fortune 500 employees and retirees to read the prospectus attentively.

According to a recent study by the Employee Benefit Research Institute, many workers are underestimating the amount they will need to save for retirement and may need to adjust their savings plan accordingly. (2) This highlights the importance of starting to plan for retirement early and consulting with a financial advisor to ensure a comfortable retirement.


Conclusion

According to a recent study by the Employee Benefit Research Institute, many workers are underestimating the amount they will need to save for retirement and may need to adjust their savings plan accordingly. (2) This highlights the importance of starting to plan for retirement early and consulting with a financial advisor to ensure a comfortable retirement. Essentially, Investing in retirement is like building a house. You need a solid foundation, which means starting to save early and regularly to build a nest egg that will support you in your golden years. Just like a well-built house requires ongoing maintenance, a well-planned retirement strategy requires ongoing adjustments and monitoring. The Federal Reserve's recent interest rate hikes are like weather patterns that can impact the stability of your financial house, but with the right preparation and guidance from a financial advisor, you can weather any storm. Finally, delaying Social Security benefits is like adding a second story to your house - it may take longer to complete, but it can provide a stronger and more comfortable foundation for your retirement.


Social Security Administration, "Retirement Benefits," accessed April 27, 2023, https://www.ssa.gov/benefits/retirement/
Employee Benefit Research Institute, "2021 Retirement Confidence Survey," March 2021, https://www.ebri.org/docs/default-source/rcs/2021-rcs/rcs_21-fs-1_expectations.pdf.


Added Fact:
As Fortune 500 employees and retirees navigate the implications of rising interest rates, it's important to consider the potential impact on mortgage rates. According to a report by Freddie Mac published on May 19, 2023, mortgage rates have been gradually increasing in response to the rise in interest rates. This means that individuals who are planning to purchase a new home or refinance their existing mortgage may face higher borrowing costs. It's crucial for Fortune 500 employees and retirees to factor in these changing mortgage rates when making decisions about their housing plans and financial strategies for the future.

Added Analogy:
Navigating the impact of rising interest rates on your finances is like sailing through changing tides. Fortune 500 employees and retirees, imagine yourself as seasoned sailors, skillfully adjusting your course to harness the winds of change. Just as the ocean currents can affect your journey, rising interest rates can influence the cost of borrowing and the returns on your investments. Like a wise captain, you must carefully assess the shifting conditions, trim your financial sails, and make strategic decisions to ensure a smooth voyage towards your retirement goals. By staying informed, seeking guidance from financial experts, and adapting your financial plan, you can skillfully navigate the changing tides of rising interest rates and steer your financial ship towards a secure and prosperous retirement.

1-2) March 2022 Federal Reserve
3) Wall Street Journal, 17 March 2022

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


The Retirement Group is not affiliated with nor endorsed by your company. We are an independent financial advisory group that focuses on transition planning and lump sum distribution. Neither The Retirement Group or FSC Securities provide tax or legal advice. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.

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