How Do Higher Interest Rates Impact Your Portfolio’s Growth?

Interest rates and investments have a complicated relationship. The value of fixed-interest bonds usually decrease when interest rates rise, while the value of floating-rate bonds might increase.

Higher interest rates are often good for financial institutions, which is why they sometimes perform well when interest rates go up. Theoretically, higher interest rates should reduce economic expansion and earnings growth and therefore be bad for equities, but there are a nearly endless number of variables that also play a role in the performance of individual stocks and the market in general.

Why Would Higher Interest Rates Affect Stocks?

Low interest rates essentially mean it’s cheap for businesses to borrow money. In simple, general terms, affordable money means more growth. That’s why low interest rates tend to lead to higher stock prices. When the federal reserve increases interest rates and makes borrowing less attractive, growth might slow.

Who Sets Interest Rates?

The Federal Reserve and the central bank have a few levers they can pull to affect interest rates and liquidity. When inflation is high or there are concerns about impending, persistent inflation, the Fed may attempt to correct it by setting higher interest rates on the money the central bank lends to commercial banks and lending institutions.

The higher cost of money discourages borrowing, reducing the growth of money in the economy and reducing inflationary pressures.

How Do Interest Rates Affect Bonds?

Interest rates can affect the attractiveness of certain types of bonds. Although you might assume higher interest rates would mean better yields and higher prices for bonds, that’s often not the case.

For example, fixed-interest bonds, like U.S. Treasury Bonds, are a more highly valued investment option when interest rates are going down since the bonds are locked in at a higher, more attractive yield rate. They’re less attractive when rates are going up.

State government and corporate bonds tend to track treasury bonds, which in turn impacts bond rates across the globe.

On the flip side, floating-rate bonds (also referred to as floating-rate notes) that are rate adjusted may outperform fixed-rate bonds when the Fed increases interest rates.

What Does Post-Pandemic Inflation Have to Do with Interest Rates?

Inflation, in simple terms, means there’s more demand and money than there is supply. If two people want the same car, the price of the car will go up.

Government spending in response to the pandemic resulted in trillions of dollars being rapidly injected into the economy, including directly into many consumers’ pockets. Generous unemployment benefits made it harder for employers to attract workers when lockdowns began to ease. Wages naturally had to go up to attract workers. Higher wages meant increased prices for goods and services.

Pent up demand, increased money in consumers’ pockets and persistent shortages in consumer goods have inevitably led to inflation. Low interest rates have also made borrowing money extraordinarily attractive – creating a perfect storm for inflationary pressure.

The Federal Reserve has suggested they’re concerned about inflation and may be increasing interest rates as soon as Q4 2022. A Reuters poll of economists in November 2021 predicted an initial 25 basis point increase in interest rates (0.25 to 0.50), followed by additional hikes for an eventual 1.25 to 1.50 percent rate by 2023. A majority of the economists who responded to the poll believed Q4 2022 was too late and hoped the Fed would act sooner.

Do All Stocks Suffer Due to Higher Interest Rates?

Not necessarily. Financial institutions that lend money often benefit from higher interest rates. Although fewer people and businesses are borrowing money, the banks experience a higher rate of return on the money they’re lending.

Even with the moderate rate hikes, interest rates would still be low compared to past years and decades, which means the impact of higher interest rates on growth might not be as severe as some investors fear.

As with all investments, growth or loss is not guaranteed. Some companies will grow while others will decline based on their business fundamentals – it’s the nature of business and the market. What’s important are the decisions investors make, their mix of assets and the investment strategies they pursue.

At Fullerton Financial Planning, we’re committed to implementing investment strategies that insulate our clients from risk while taking advantage of growth opportunities where they can be found. Every retirement investor is different. The strategy you pursue while you’re in retirement will be different than the strategy you benefited from before you started taking distributions.



We are sensitive to our clients’ needs and risk tolerances. You can trust your Fullerton Financial Planning fiduciary to listen to your concerns and offer actionable advice. Contact us at (623) 974-0300 to learn how we can help you live comfortably, even during uncertain economic times.