How the Fed’s Rate Hikes Affect Investors

A recent Vanguard blog addresses the issue of the Fed’s ongoing rate hike program and how it will affect investors. Here are highlights:

“Higher yields on cash are good news for savers”—the article notes that since the Fed started raising rates in December 2015, investors have moved more than $60 billion into money market funds, and those inflows could rise with further rate hikes.

Mixed outlook for bonds—”Bond investors might cringe at our outlook for rising rates but, in truth, the short-term pain experienced when rates rise is offset by higher future returns. We also expect fixed income assets to provide increased portfolio diversification benefits as interest rates continue to normalize.”

On how rising rates affect stocks, the article asserts, “the data may surprise you,” adding that Vanguard research does not show a pattern of falling share prices when rates rise. “In fact,” it says, “hiking regimes often take place when the economy is performing strongly, and earnings growth is robust, and therefore stocks tend to perform respectably during those periods.”

The article concludes by noting that although the global interest rate environment is becoming “less accommodative,” the shift doesn’t necessarily support a “tactical tilt toward bonds or stocks. And, at any rate, tilting would amount to trying to time the markets, which research has shown time and again is a strategy that often doesn’t work out well.”