The financial landscape is changing quickly in the United States. As inflation continues to soar to new record highs, you’re spending more money at the pump, at the grocery store, and anywhere else you go. As a result, many feel less secure and are focusing on saving and investing rather than spending.
Any time the spending landscape changes, the investing landscape tends to follow. That’s precisely what we’re seeing right now.
The Federal Reserve has been on an interest rate hiking spree, leading to increasing credit card, secured loan, and mortgage interest rates – but those rising rates could be a good thing for your investment portfolio. In fact, long-term passive investments like CDs are starting to emerge as the star of the show.
What Is a CD
The term CD is an acronym that means Certificate of Deposit. Essentially, it’s a certificate that you can buy that acts as a long-term passive investment. There are a few terms to consider when you buy a CD:
- Fixed Terms. CDs come with fixed terms, typically ranging from a few months to five years, though you may come across other options with longer terms. If you cash in your CD before it matures, you can expect to pay a fee to the bank to do so.
- Fixed Interest. When you buy a CD, your interest becomes your return on investment. These interest rates are fixed for the life of the investment vehicle, regardless of what happens next with the Federal Reserve.
- Returns. CDs typically offer significantly higher interest rates than traditional savings accounts that allow you to deposit and withdraw money at any time.
Why Now Is the Time to Buy a CD
The Federal Reserve’s interest rate has a significant impact on the banking industry. When the Federal Funds Rate is low, interest rates on credit cards, mortgages, and other loans are low. The same goes for returns on CDs and other fixed-income investments. During these times, the landscape is perfect for borrowers, but not great for passive investors.
However, times are changing. The Federal Reserve has moved forward with historic hikes to the Federal Funds Rate, the rate on which financial institutions base their pricing. That’s bad news for borrowers, but it means interest rates on CDs are offering meaningful returns.
Depending on the term of your CD, you could generate 3% or more annually on your investments – that’s far better than the loss of 20% the S&P 500 has produced this year.
Why Is the Federal Reserve Increasing Interest Rates
The Federal Reserve’s job is to maintain monetary policies that keep inflation in check and support our economy. Unfortunately, inflation has been rising at a breakneck pace. You’re paying 8.3% more today than you were this time last year for the same products.
That’s dangerously high.
In an effort to combat this, the Federal Reserve is essentially pulling money out of the monetary system. Increasing interest rates mean consumers are less likely to take out loans or use credit cards. With less demand across the United States, corporations are going to have to make tough decisions in terms of pricing in an effort to appease consumers to buy their products.
So, increasing interest rates creates pricing pressure – which may result in slowing inflation rates.
How Long Will Rate Hikes Continue?
There’s no way to tell how long the Federal Reserve is going to continue increasing its rate regularly – the answer to that question depends on how the United States economy responds to the Fed’s moves.
The Federal Reserve’s inflation rate goal is 2%. When inflation falls close to or below 2%, you can expect the Fed to slow, or even reverse its interest rate activities. This could take months or even years to achieve.
How to Lock in a Meaningful Return on Investment
Since there’s no way to tell how long the Fed will continue to regularly increase its interest rate, it’s best to lock in the higher returns on your investments now. So, how do you go about doing that?
You buy a CD today.
As mentioned above, one of the key features of a CD is that it comes with a fixed interest rate. That means if you buy one when interest is high, you can expect a high return on your investment until your CD matures.
There’s no way to determine what’s going to happen next in terms of Federal Reserve interest rates. What we do know is that today’s rates are making CDs more appealing and that if you buy one now, you can lock in high returns. Consider contacting your friends at Western Bank to learn more about your options.