The United States Federal Reserve FED on September 21, 2022 raised the interest rates, which is considered to be the third consecutive 0.75 percentage point hike and the fifth increase since the beginning of 2022. These series of increases have brought the federal funds rate to a range of 3 percent to 3.25 percent, the highest it’s been since 2008.
Under this situation, investors have to pick their investments wisely, think long-term, and not panic. Particularly, some investments, such as stocks, are correlated negatively with higher rates. For instance, during these hikes the S&P 500 has decreased about 20 percent as fears have increased among investors that the United States Federal Reserve’s efforts to slow inflation could plunge the economy into recession.
Bond Investment
Comparing to stocks, bonds are traditionally viewed as a less-volatile investment. Because bond prices and interest rates move in opposite directions, with bond index increased more than 13 percent in 2022.
Generally, longer-maturity bonds come with a longer duration, meaning that they decline more in value in response to hikes in interest rates. Shorter-term bonds will tend to hold up better during rising rate regimes.
One investment an investor would be wise to consider is I bonds. These bonds, issued by the Treasury pay a fixed interest rate throughout the life of the bond plus a rate pegged to changes in inflation. Investors of I bond may get an interest rate of 9.62 percent.
However, there are a few disadvantages of investing in the I bond. Among them: They can’t be redeemed within 12 months of the purchase date, and investor will face a penalty equal to three months’ worth of interest if he or she cash out any time over the first five years of owning the bond. Also, the bonds must be purchased directly from the Treasury’s website, and each investor can only invest no more than 10,000 USD per calendar year.
Saving Account
One advantage of a rising interest rate environment is that it becomes more lucrative to save in a saving account. Generally, interest rates on bank deposits tend to be correlated with rises in the fed funds rate. During the interest rate hikes in 2022, the majority of the United States larger banks, for instance Bank of America, Chase, United States Bank and Wells Fargo, each offer an annual rate of 0.01 percent on saving account. And the national average rate on savings accounts is 0.13 percent. Few online banks, however, are offering interest rates between 2 percent and even 2.5 percent on savings accounts.
Unfortunately, 0.13 or 2,5 percent on saving account may seem like cold comfort for savers who are enduring inflation of 8 percent. In this environment, you’re going to lose money if you have cash sitting on the saving account or sideline. And even if current rates on your saving account or cash reserves won’t keep up with inflation, earning little interest on your money is better than earning nothing.