Fed Rate Hike 2022: How Is It Going To Affect Investors?

On December 14, The Federal Reserve (Fed) approved another hike on interest rate. This is a 50-basis point increase, and the 7th interest rate hike in 2022. It also signaled its strategy for implementing monetary policy to reduce inflation. Let’s take a look at the 2022 Fed rate hike and find out its effects on the market and investors.

Fed rate hike 2022: How is it going to affect investors?

Which causes the Fed rate hikes?

When the Fed raises interest rates, they are referring to the federal funds rate (FFR). The Federal Open Market Committee (FOMC) sets a target range for the federal funds rate at its regular meetings, which serves as a reference for the interest rates that big commercial banks charge each other for overnight loans.

Table: Fed rate hikes in 2022

To put it simple, the Federal Reserve adjusts fed funds in response to economic conditions. However, they are also attempting to achieve conditions that meet their dual mandate, as established by Congress: maintain price stability and maximize employment. With the recent hike in December, the interest rate is now at its highest level in 15 years.

The Fed raises interest rates when the economy overheats (too much inflation) and lowers rates when the economy appears weak (high unemployment). As you know, the federal funds rate was near zero until the Q1 of 2022. The Fed was also continuing to purchase billions of dollars in bonds each month to stimulate the economy. All of this despite four-decade highs in various measures of US inflation.

When the Fed decided it was time to act on inflation, it moved quickly, raising the fed funds rate by three percentage points in about six months. The goal is to reduce high inflation rates that are eroding Americans’ purchasing power without triggering a recession.

“In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all”, Federal Reserve Chair Jerome Powell said at an August speech at Jackson Hole.

Raising interest rates is to fight inflation and high prices

Impact of Fed rate hike on markets and investors

1. Impact on US market & investors:

• A Fed rate hike means higher borrowing costs for businesses. Stocks that are not profitable suffer the most in such situations due to a lack of available cash flows.
• Growth stocks rely on capital availability to expand their operations, and higher interest rates imply higher borrowing costs. This may have an impact on their earnings as well.
• Stocks with strong cash flows that do not rely on additional debt to fund operations, on the other hand, benefit. During a Fed rate hike, stocks in the essentials, consumer goods, and industrial sectors may perform better.
• Investing in high-quality AAA-rated bonds can be beneficial. Short-term bonds are preferred over long-term bonds because they are less sensitive to changes in interest rates. Bond prices are inversely related to interest rate increases as a general rule. As a result, the price of short-term bonds is less volatile than that of long-term bonds.

2. Impact on global market & investors:

• A Fed rate hike also has a negative impact on the currency market, as it makes the USD strong compared to currencies of many other countries, including JPY, KRW, GPB, INR, etc.
• On stock: When the Fed raises interest rates, the cost of borrowing money rises for individuals and companies. Higher costs and less business may result in lower revenues and earnings for public companies over time, potentially affecting their growth rate and stock value.
• On bonds: Bonds are sensitive to changes in interest rates. When there is a Fed rate hike, the market price of existing bonds falls immediately. This is because new bonds with higher interest rate payments will soon be available on the market. Existing bonds’ prices will fall to reflect higher overall rates, making their comparatively lower interest rate payments more appealing to investors.

Rate hikes place big impact on stocks, bond, savings accounts and bank deposits

• On savings accounts and bank deposits: Fed rate hikes can be a bad thing for borrowers, yet they are beneficial to anyone with a savings account. When the FOMC raises interest rates, banks compete with each other and increase the amount their clients can earn from deposit accounts. That means the annual percentage yields (APY) on savings, checking, certificates of deposit (CDs), and money market accounts will rise as well. 

What should investors do?

Global investments are subject to market risks; before investing, you should carefully read all relevant documents. Before selecting a fund or designing a portfolio that meets your needs, please consider your specific investment requirements, risk tolerance, goal, time frame, risk and reward balance, and the cost of the investment.

Any investment portfolio’s performance and returns cannot be 100% predicted or guaranteed, but it should be better with a due diligence beforehand. Most important thing, One IBC recommends you to seek advice from an experienced advisor, because “You are more likely to fail than succeed without first consulting with a professional.”