Are Higher for Longer Interest Rates Bad for You?

Posted by Jacob Radke
September 26, 2023

This is the Federal Reserve’s Summary of Economic Projections, and I acknowledge that there is a lot to unpack here.

However, I want to draw your attention to the forecasts for real GDP, unemployment, and interest rates, highlighted in that order.

Let me break down what these numbers tell me.

In 2022, growth and inflation were on the high, prompting the Fed to raise rates to cool things down. Now we've reached high interest rates and slowed down (in some cases even gone negative). The next phase will likely see falling rates and declining growth, but the timing remains uncertain.

Whenever you observe the blue line trending downward, it signifies rising short-term rates (Fed rates), driven by a robust economy. The stock market rallies during this period due to the robust economy, but as rates invert, the economy heads into a recession, impacting company earnings, and causing the stock market to decline.

So, to address the question: Are higher, longer-lasting interest rates bad for you?

In my opinion, in the overwhelming majority of cases, higher interest rates are not detrimental.

Income seekers benefit from increased income, and diversification in fixed income becomes more appealing. Additionally, coming out of a Federal Reserve rate-hiking cycle, bonds often yield attractive 5-year returns, because rates tend to fall in the coming years after a cycle.

Interestingly, a company named Public is selling T-bills to millennials.

However, individuals without assets may struggle with higher borrowing costs, making it challenging to save in a savers' market.

While interest rates significantly influence stock market valuations through the discount rate, this is precisely why a declining market is referred to as a savers' market. It essentially offers people a chance to make wiser investment decisions and potentially move forward financially.

Higher, longer-lasting interest rates create opportunities for savvy individuals to make sound financial decisions, but they also open the door to missed opportunities.

In a nutshell high interest rates can bring down the stock market, but opens a buying opportunity, and offers income and capital preservation investors a door to more attractive, safer, income and preservation.

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