Understanding the Rise in Interest Rates: What It Means for American Axle & Manufacturing Employees and Their Retirement Plans

Healthcare Provider Update: Healthcare Provider for American Axle & Manufacturing American Axle & Manufacturing collaborates with a large network of healthcare providers and insurers to offer employee health benefits. While specific healthcare providers may vary based on the region and the chosen health plan, employees typically have access to major insurers like Blue Cross Blue Shield, UnitedHealthcare, and Aetna, along with numerous in-network specialists and facilities. Brief Overview of Potential Healthcare Cost Increases in 2026 As American Axle & Manufacturing employees look toward 2026, they should brace for significant healthcare cost increases. Predicted premium hikes in the Affordable Care Act (ACA) marketplace may see some states facing increases of over 60%. The projected expiration of enhanced federal subsidies could leave millions with out-of-pocket premium increases nearing 75%. These surging costs are fueled by a combination of escalating medical prices, particularly for specialty drugs, and ongoing pressures on insurers to raise their rates in light of record earnings from previous years. Consequently, employees must strategically evaluate their health coverage options and consider actions to mitigate rising expenses. Click here to learn more

Interest rates are a key driver of most financial assets. While most often referenced in relation to the bond market, rates are also a key input in traditional equity valuation models, which incorporate market interest rates to determine the appropriate rate to discount future cash flows. Interest rates are an essential element in bond pricing and the yield that investors require to own a particular fixed-income security. Since hitting an all-time low in 2020, interest rates increased in 2021 and have continued that climb higher thus far in 2022. This has put pressure on fixed incomes and certain areas of the equity market, which has led to stress in certain areas of the stock market, such as growth stocks, which can be sensitive to interest rate shocks. With that in mind, let’s examine why rates have been moving up, and whether this should be a cause for concern for American Axle & Manufacturing employees.

MORE AGGRESSIVE FEDERAL RESERVE
The Federal Reserve (Fed) has already raised interest rates by 75 basis points this year. A 25 basis point hike in March followed by a 50 basis point hike in May. The Fed is currently expected to hike rates by 50 basis points in both the June and July meetings and will continue to hike through the better part of 2022. With inflation running hot and the job market showing strength, the fact that the Fed is finally moving away from zero shows confidence in the health of the job market. But the speed with which interest rates are expected to go up underscores its concern about the soaring cost of living. Americans living in areas like California or New York will experience this policy shift through higher borrowing costs: No longer will it be insanely cheap to take out mortgages or car loans and this along with higher inflation may lead to less investment in the market and more spending on needs, which is a main reason for market volatility, and important for American Axle & Manufacturing employees and retirees to keep in mind.

INFLATION CONCERNS
Inflation is also a primary determinant of long-term interest rates. Rising inflation has the potential to eat away at fixed-income returns, so naturally, inflation expectations are a component of the yield that investors require to own fixed income. Put simply, inflation is a result of too much money chasing too few goods, and there are concerns that the increase in the level of money in circulation may lead to this. The extraordinary level of fiscal and monetary stimulus put in place to combat the economic damage of Coronavirus caused a significant increase in the M2 money supply. As a result, we are currently seeing this increase in the level of money in circulation translate to a pickup in consumer spending, but also elevated inflation.

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RISKS OF A RECESSION
Now that the pandemic has started to recede, the Fed has once again started to raise short-
term interest rates. This policy change has caused market volatility to spike for the three
major reasons to the right.

Today as the Fed begins to aggressively hike interest rates, market participants worry we may endure a period of high inflation alongside weakening economic growth — otherwise known as stagflation.

This environment is another example of why we believe in and suggest to our clients from American Axle & Manufacturing that staying diversified is the best way to insulate portfolios from being too exposed to one risk factor.

Economic Definitions
M2 Money Supply: The M2 Money Supply, also referred to as “M2” or “Money Stock,” measures the amount of currency in circulation. M2 includes M1 (physical cash and checkable deposits) as well as less liquid money, such as saving bank accounts.