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Understanding the Impact of Rising Interest Rates on Your Finances: Insights for Travelers Employees

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On March 16, 2022, the Federal Open Market Committee (FOMC) of the Federal Reserve raised the benchmark federal funds rate by 0.25% to a target range of 0.25% to 0.50%. This is the beginning of a series of increases that the FOMC expects to carry out over the next two years to combat high inflation. 1



Along with announcing the current increase, the FOMC released economic projections that suggest the equivalent of six additional 0.25% increases in 2022, followed by three or four more increases in 2023. 2  It's important that Travelers employees and retirees keep in mind that these are only projections, based on current conditions, and may not come to pass. However, they provide a helpful picture of the potential direction of U.S. interest rates for those living in areas like Austin, Texas.

What is the federal funds rate?
The federal funds rate is the interest rate at which banks lend funds to each other overnight to maintain legally required reserves within the Federal Reserve System. The FOMC sets a target range, usually a 0.25% spread, and then sets two specific rates that act as a floor and a ceiling to push the fund's rate into that target range. The rate may vary slightly from day to day, but it generally stays within the target range.

Although the federal funds rate is an internal rate within the Federal Reserve System, it serves as a benchmark for many short-term rates set by banks and can influence longer-term rates as well.

Why does the Fed adjust the federal funds rate?
The Federal Reserve and the FOMC operate under a dual mandate to conduct monetary policies that foster maximum employment and price stability. Adjusting the federal funds rate is the Fed's primary tool to influence economic growth and inflation.

The FOMC lowers the federal funds rate to stimulate the economy by making it easier for businesses and consumers to borrow and raises the rate to combat inflation by making borrowing more expensive. In March 2020, when the U.S. economy was devastated by the pandemic, the Committee quickly dropped the rate to its rock-bottom level of 0.00%–0.25% and has kept it there for two years as the economy recovered.

The FOMC has set a 2% annual inflation goal as being consistent with healthy economic growth. The Committee considered it appropriate for inflation to run above 2% for some time in order to balance the extended period when it ran below 2% and give the economy more time to grow in a low-rate environment. However, the steadily increasing inflation levels over the last year — with no sign of easing — have forced the Fed to change course and tighten monetary policy.

How will consumer interest rates be affected?
This is a question we've been receiving from Travelers employees and retirees. The prime rate, which commercial banks charge their best customers, is tied directly to the federal funds rate and generally runs about 3% above it. Though actual rates can vary widely, small-business loans, adjustable-rate mortgages, home-equity lines of credit, auto loans, credit cards, and other forms of consumer credit are often linked to the prime rate, so the rates on these types of loans typically increase with the federal funds rate. Fed rate hikes might also put upward pressure on interest rates for new fixed-rate home mortgages, but these rates are not tied directly to the federal funds rate or the prime rate.

Although rising interest rates make it more expensive for consumers and businesses in areas like Austin, Texas to borrow, Travelers employees, retirees, and others who seek income could eventually benefit from higher yields on savings accounts and certificates of deposit (CDs). Banks typically raise rates charged on loans more quickly than they raise rates paid on deposits, but an extended series of rate increases should filter down to savers over time.


What about bond investments?
Interest-rate changes can have a broad effect on investments, but the impact tends to be more pronounced in the short term as markets adjust to the new level.

When interest rates rise, the value of existing bonds typically falls. Put simply, investors would prefer a newer bond paying a higher interest rate than an existing bond paying a lower rate. Longer-term bonds tend to fluctuate more than those with shorter maturities because investors may be reluctant to tie up their money for an extended period if they anticipate higher yields in the future.

Bonds redeemed prior to maturity may be worth more or less than their original value, but when a bond is held to maturity, the bond owner would receive the face value and interest, unless the issuer defaults. Thus, rising interest rates should not affect the return on a bond you hold to maturity, but may affect the price of a bond you want to sell on the secondary market before it reaches maturity.

Although the rising-rate environment may have a negative impact on bonds you currently hold and want to sell, it might also offer more appealing rates for future bond purchases.

Bond funds are subject to the same inflation, interest rate, and credit risks associated with their underlying bonds. Thus, falling bond values due to rising rates can adversely affect a bond fund's performance. However, as underlying bonds mature and are replaced by higher-yielding bonds within a rising interest-rate environment, the fund's yield and/or share value could potentially increase over the long term.

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How will the stock market react?
Equities may also be affected by rising rates, though not as directly as bonds. Stock prices are closely tied to earnings growth, so many corporations could stand to benefit from a more robust economy, even with higher interest rates. On the other hand, companies that rely on heavy borrowing will likely face higher costs going forward, which could affect their bottom lines.

The stock market reacted positively to the initial rate hike and the projected path forward, but investors will be watching closely to see how the economy performs as interest rates adjust — and whether the increases are working to tame inflation. 3

The market may continue to react, positively or negatively, to the government's inflation reports or the Fed's interest-rate decisions, but any reaction is typically temporary. As always, it's important that Travelers employees and retirees maintain a long-term perspective and make sound investment decisions based on their own financial goals, time horizon, and risk tolerance.

The FDIC insures CDs and bank savings accounts, which generally provide a fixed rate of return, up to $250,000 per depositor, per insured institution. The return and principal value of stocks and investment funds fluctuate with market conditions. Shares, when sold, may be worth more or less than their original cost. Investments offering the potential for higher rates of return also involve higher risk.

Investment funds are sold by prospectus. It's important that Travelers employees and retirees consider the fund's objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. We'd like to, once again, remind Travelers employees and retirees to be sure to read the prospectus carefully before deciding whether to invest.


1–2) Federal Reserve, March 16, 2022
3) The Wall Street Journal, March 17, 2022

 

How does the Travelers 401(k) Savings Plan compare to market standards, and what strategies can employees implement to maximize their retirement benefits while working at Travelers, considering the various contribution options available?

Travelers 401(k) Savings Plan Comparison to Market Standards: The Travelers 401(k) Savings Plan offers immediate eligibility upon hire, automatic enrollment, and flexible contribution options between 1% and 75% of pay, with a mix of pre-tax and Roth options. Employees benefit from a generous dollar-for-dollar employer match on the first 5% of eligible pay, up to $6,000 annually. To maximize retirement benefits, employees should consider contributing at least enough to receive the full employer match and periodically review their investment choices with the aid of Financial Engines, an independent advisory firm provided by Travelers.

In what ways does the Travelers Pension Plan provide a safety net for employees as they transition into retirement, and how does participation in this defined benefit plan impact financial planning for retirement among long-term employees?

Impact of the Travelers Pension Plan: The defined benefit Pension Plan at Travelers, funded entirely by the company, provides a secure foundation for retirement with benefits based on age, salary, and years of service. This plan is crucial for long-term financial planning as it guarantees a predictable income stream in retirement, supplementing savings and Social Security benefits. Employees are eligible after one year of service, which encourages long-term commitment and aids in retirement readiness.

What resources does Travelers offer to assist employees in making effective investment decisions within their 401(k) plans, and how can employees leverage these resources to reach their personal retirement goals?

Investment Decision Resources in Travelers 401(k) Plans: Travelers offers resources such as Financial Engines to assist employees in making informed investment decisions within their 401(k) plans. This service helps employees tailor their investment strategies to their individual retirement goals and risk tolerance. Engaging with these resources can significantly enhance employees' ability to grow their retirement savings effectively.

How can employees best understand the interplay between their personal savings and the benefits provided by Travelers, particularly in relation to healthcare and retirement planning as they age?

Interplay Between Personal Savings and Travelers Benefits: Understanding the interplay between personal savings and company-provided benefits is vital for comprehensive retirement planning. Travelers employees should consider how their benefits package, including health care, life insurance, and disability coverage, complements their savings and Social Security. Regular consultations with financial advisors provided through the company can help employees strategize effectively as they age.

What should employees at Travelers know about the eligibility requirements and benefits associated with the company's Long-Term and Short-Term Disability policies as they prepare for a secure retirement?

Understanding Disability Policies at Travelers: Travelers provides both short-term and long-term disability coverage, which is crucial for protecting income in the event of an unforeseen health issue. Short-term disability covers up to 13 weeks at varying pay levels, while long-term disability kicks in for more severe cases, offering up to 60% of base salary. Employees should familiarize themselves with these policies early to ensure comprehensive coverage as they approach retirement.

How does the company's Paid Time Off (PTO) policy under Travelers facilitate work-life balance, and what implications does this have for employees' long-term health and preparedness for retirement?

Benefits of Travelers PTO Policy: The Paid Time Off (PTO) policy at Travelers allows employees to accrue significant time off based on service length, enhancing work-life balance and contributing to long-term health and well-being. This policy supports employees in maintaining a healthy work-life balance, which is crucial for long-term career sustainability and retirement preparedness.

What strategies can employees implement to effectively utilize the Educational Assistance Program offered by Travelers not only for their personal development but also as a way to enhance their retirement planning prospects?

Utilizing the Educational Assistance Program: Travelers' Educational Assistance Program supports employees in pursuing further education relevant to their professional growth and retirement planning. By investing in additional qualifications and skills, employees can not only enhance their career prospects at Travelers but also increase their earning potential for better retirement savings.

How does the Business Travel Accident Plan improve the overall financial protection for employees at Travelers, and what are the claims procedures if an incident occurs while conducting company business?

Financial Protection through the Business Travel Accident Plan: The Business Travel Accident Plan provides a safety net by offering coverage of up to three times the annual base salary, up to $2 million. This plan is crucial for financial protection against unexpected incidents during business travel, and employees should understand the claims procedures to utilize this benefit effectively.

In terms of post-retirement benefits, how does Travelers support its retirees concerning access to resources like financial planning services or health benefits?

Post-Retirement Benefits at Travelers: Travelers supports retirees by offering access to financial planning services and health benefits. These resources are vital for maintaining financial stability and health during retirement. Retirees should actively engage with these services to optimize their retirement lifestyle and financial management.

For employees looking for further information or assistance regarding their retirement plans and benefits at Travelers, what are the best ways to contact the company to ensure they receive accurate and timely information?

Accessing Retirement Plan Information at Travelers: Employees seeking information or assistance regarding their retirement plans can contact Travelers' Employee Services Unit via email at 4-ESU@travelers.com or by calling 800.441.4378. Utilizing these channels ensures employees receive accurate and up-to-date information about their retirement benefits.

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