You need to figure out how to take advantage of Fed's rising interest rates, to help protect your hard-earned money while giving you opportunities to grow it over time.
The Federal Reserve raised its interest rate by .75 percentage points this year— the most aggressive rate hike since 1994.
This is creating one of the most aggressive tightening cycles in decades to fight skyrocketing inflation.
As the Fed is expected to continue to raise rates throughout the year, the dilemma still exists: keep raising rates and increase the potential for an economic slowdown or recession, or don't raise the rates and allow inflation to run rampant.
In this article, we'll tell you everything you need to know about why this happens and how to make the best of the situation. Keep reading to learn how to protect your business and personal finances.
What Causes Interest Rates to Rise?
An interest rate
is a cost for a person to borrow money. Likewise, it's also the compensation for the service and the risk of lending money to that person.
Both sides are vital for keeping the economy moving by allowing people to borrow money and spend money.
However, these rates always change depending on the economic situation and the different types of loans.
It's important to understand why these changes happen.
For one, interest rates are a resulting factor in the supply and demand of credit.
If there is a higher demand for credit, interest rates will rise.
If there is a decrease in demand, interest rates will lower.
Another important factor is inflation — like the record-breaking inflation we are seeing now.
This happens because lenders want to be compensated for the decreased purchasing power of the cash they are paid in the future due to inflation.
Lastly, and most importantly, the government has a powerful say in how interest rates are affected.
They make announcements on how the interest rate will rise and fall to help curb things like inflation (which is happening now).
They do this by changing the federal funds rate (the rate that institutions charge each other for short-term loans). This eventually affects other lending rates that banks use. To do this, the government buys or sells U.S. securities.
When they purchase more securities, banks get more money to use for lending, which allows interest rates to decrease.
When the government sells securities, they have less money to lend, which increases interest rates.
Learn how to manage your personal finances during a crisis
How to Take Advantage of Fed Rate Hikes in 2022
Although rising interest rates might initially seem like a negative, these Fed hikes can be both a blessing and a curse for consumers.
But with the proper knowledge, you can take advantage of situations when interest rates rise.
Let's look at some strategies you can use as an individual consumer and a small business owner.
How to Take Advantage of Interest Rates Raise as a Consumer
Protecting your and your family's wallet during rising rate environment periods is important. Here's what to do when the Fed raises interest rates.
Minimize Credit Card Debt
When the government forces higher interest rates (Fed funds rate
), it also forces banks to raise their lending rates. This means your credit card
rates will start going up soon, too.
If you have any balances on your credit cards, especially ones with high variable interest rates — transfer them to zero-rate transfer cards that have a zero rate for an extended period.
This protects you from rate hikes for a year or two and gives you time to pay off your debt. This can help you survive raising interest rates and give you more savings in the long run.
Lock in Fixed Rates for Home Loans
Mortgage rates have been rising all year and will probably continue.
If you are about to refinance your home or are close to buying a new one, make sure to lock in the lowest fixed-rate mortgage that is available to you.
Of course, it's important not to just jump into a huge purchase just because you think the interest rates might go up. Rushing into a big investment like a house or a car will just cause more trouble in the long run.
If you have a variable rate home equity line of credit
, ask your lender if they will be able to give you a fixed rate on the rest of the balance.
Shop Around For the Best Bank Savings
If you have a large amount of savings in big banks that give you nearly nothing in interest for savings accounts, don't expect a rise because the Fed is raising interest rates.
Those huge banks have lots of deposits saved up and are not worried about getting new customers.
On the other hand, online banks offer far better rates and actively increase their rates as benchmark interest rates continue to rise.
Look into finding an online bank that will make your money earn more.
Think About the Pricing Power of Stocks
If you're considering investing in a company that might do well in a rising rate environment, think about which companies will have strong pricing power.
For example, financial service businesses like banks usually do well during these times because they make more money on loans.
Insurers also do well because the number of yields on securities in their portfolio also tends to rise.
On the other hand, real estate and tech companies usually don't thrive when there are rising rates.
Get Short-Term Bonds
The prices of bonds will fall when there are rising rates, which is not great if you already own them. But if you're looking to buy bonds, you might benefit from rising rates — especially short-term bonds.
The prices of short-term bonds fall even more sharply than long-term bonds.
Because of the high inflation rates, Series I savings bonds are great because you can preserve the buying power of your money.
If you are looking for a place to invest, these short-term bonds might be a great place to start looking.
Apply now for a loan with minimum requirements
How to Take Advantage as a Small Business Owner
To survive this period of intense inflation and rising interest rates, small business owners will have to take smart action to weather the storm.
Here are a few steps you can take as a small business owner.
Consider Making Large Purchases Now
If you've been planning on purchasing large equipment, a new building, or stocking up on inventory shortly, now might be the time to do it.
You can lock in a fixed-rate load while interest rates are still relatively low.
For example, equipment financing rules from the IRS allow business owners to deduct 100% of the equipment purchased in the same year as opposed to over several years.
This could change with the interest rate hikes, though. Check to see what tax laws may affect you.
Consolidate or Refinance Debts
Now is a good time to revisit your debt structure with your financial advisors. Look for loan rates that might be adjustable now, but not in the near future.
It's important to make sure that those rates will not only work for you now but in a few years when rates increase.
If you have loans or debt that your bank can adjust, see if you can convert them into fixed rates that make sense.
Optimize Your Liquidity
If your company is flush with cash, you can take advantage of rising rates by putting some of your assets in high-yield banks or low-risk investment accounts.
This will allow you to take advantage of higher rates with your liquid funds.
Move Payables to a Commercial Card
Higher interest rates could make cash flow harder for certain types of companies.
For example, you might have to pay more to borrow money.
Also, customers won't spend as freely as they used to or may take longer to settle their accounts.
Moving outgoing expenses to a commercial credit card could help you regain control over your working capital.
This won't cost you interest if you pay on time, and you can earn rewards and points.
Sell Assets in Rising Rate Environments
Businesses that have unnecessary property or assets can profit by selling assets before rates rise.
Many buyers will be looking to buy when they can lock in low, long-term rates from lenders, which means they might be willing to pay a premium to acquire necessary assets before rates rise.
How You Can Benefit From Fed Interest Rates Rise
You can benefit from a Fed rate hike by carefully researching and investing in the right places.
So what are the best investments in a rising interest rate environment? Here are a few:
- Investing in banks or brokerage firms
- Investing in cash-rich companies
- Locking in low rates
- Making large purchases through financing
- Embracing short-term bonds
Make sure to talk with a financial advisor to make decisions that benefit you and your business.
What to do when the Fed raises interest rates?
If you're worried about what rising interest rates may mean for your finances, there are a few things you can do to prepare.
- Take a close look at your debt situation and see where you can cut expenses or make some extra payments to get ahead.
This will help you make the most of your money and keep your payments manageable even if rates go up.
You should also consider saving more in an emergency fund, so you have a cushion to cover unexpected expenses if needed.
- Stay tuned to the news and market trends to anticipate any changes that might impact your situation.
By staying informed and being proactive, you can help protect yourself from financial shocks like rising interest rates.
What and where to invest with higher interest rates?
One option is to look into certificates of deposit (CDs). With CDs, you can usually find interest rates significantly higher than what you would get with a regular savings account.
However, it's important to remember that there may be penalties if you withdraw your money before the CD has reached its maturity date.
Another option is to invest in bonds. When you invest in bonds, you essentially lend money to a government or company.
In return, you receive periodic payments from the bond issuer as well as the principal amount that you originally lent them. Bonds can be a relatively safe investment option.
Industries, Individuals, and Sectors That Benefit From Rising Rates
There are several "winners" when it comes to rising rates.
One group is people with large amounts of savings in their accounts.
With low-interest rates, many kinds of banks (mostly online) are hiking their savings rates, allowing people with money to earn more.
As we mentioned earlier, banks and brokers also benefit from rising rates.
- Banks can earn more from the spread between what they pay in savings accounts and what they earn from debit from Treasuries.
- Brokers benefit from increased interest income when rates increase.
Insurance stocks can also do well as rates rise. The relationship between interest rates and insurance companies is almost linear, which means the higher the rate, the more growth.
Manufacturers and companies that sell cars, clothes, hotels, restaurants, kitchen appliances, and movies might also benefit from rising interest rates as well.
Pros and Cons of the Fed Raising Interest Rates
This article covered a lot of information, but let's take a snapshot look at the pros and cons of fed raising rates.
Here they are:
Pros of Fed Raising Rates
- Decreased consumer demand can bring inflation and prices down to "normal."
- It's a good time for people to save money.
- Individuals living on retirement income benefit from rising interest rates.
- The U.S. dollar is stronger as interest rates attract foreign investment.
Cons of Fed Hikes Rates
Consumers will pay higher interest rates on credit cards, home equity lines of credit, and private student loans, making it more expensive to borrow money.
- Interest rates could cause the economy to tip into a recession.
- It will make it harder for people with debt to pay it off.
- Buying and selling a home is more difficult for those in the market.
- It's hard to predict when things will return to normal, if at all.
Protect Your Business and Finances as the Fed Raises Interest Rates
That's everything you need to know about how to take advantage of fed rising interest rates.
Although the rise in interest rates can be a painful experience for both consumers and businesses, it's important to keep calm and understand that not only will it not last forever, but there are also ways to benefit from the situation.
By using smart financial decisions, your business can survive and come out stronger than ever on the other side.
At Camino Financial, we aim to invest in opportunity and back minority-owned small businesses.
Even in tough times like this, we help enable growth within overlooked American communities by unlocking capital for these underserved micro-entrepreneurs.
Apply now for a loan with minimum requirements
What happens when the Fed increases interest rates?
When the Federal funds rate increases interest, it becomes more expensive for banks to borrow money.
This causes banks to loan out less money, making it more difficult for businesses to get loans and leading to a slowdown in economic growth.
It can also make it more expensive for people to borrow money for things like cars and mortgages.
Are interest rates rising?
Fed funds rate has been gradually raising interest rates over the past few years, and most experts expect them to continue rising in the future.
This generally means that borrowing costs will go up for consumers and businesses, which can have a ripple effect throughout the economy.
So far, the Fed has carefully monitored the effects of higher rates and seems intent on keeping them relatively low by historical standards.
That said, if inflationary pressures start to build or the economy otherwise deteriorates, interest rates could rise more quickly than expected.
Is a high-interest rate good or bad?
A high-interest rate is good if it's a sign that the economy is strong and investors are confident in the prospects of the company or government issuing the debt.
It is bad if it's a sign that the economy is weak and investors are worried about being repaid.
Why are interest rates important?
Interest rates are important because they are one of the key indicators of the health of an economy.
When interest rates are high, it can be difficult for businesses and consumers to borrow money, which can stunt economic growth.
Low-interest rates make it easier for businesses and consumers to borrow money, which can help spur economic growth.
In addition, interest rates play a role in how much it costs to borrow money. When interest rates are high, it costs more to borrow money.