The Pros and Cons of Rising Interest Rates

This year interest rates have risen to levels that haven’t been seen in more than 15 years. 😱

 ⚖️ Weigh the pros and cons of rising interest rates and how they impact your financial strategy presented by Laurence Hale, AAMS®, CRPS® . 

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Welcome to You and Your Money. Empowering you to reach your goals with tips to help you Plan Well, Invest Well and Live Well. Today's episode features Laurence Hale, principal, managing partner and chief investment officer at Weiss, Hale and Zahansky Strategic Wealth Advisors. Now onto today's topic. Well, our main topic today does center around the news that came out yesterday. And as the Fed has been making news lately with that the pros and cons of rising interest rates and Laurence has take on what may be coming next. So this rise in interest rates in recent years has been remarkable. Could you just elaborate on how the surge is impacting various financial products and sectors? Yeah, You know, to go back to some of the figures I posted, you know, looking at a 30 year fixed rate mortgage, if you look at where a 30 year fixed rate mortgage rate was back in October of 2020, So about three years ago, it was around 3%. You know, we used to use some kind of loose terminology that that money was nearly free. A few years ago, you think back to where we were in the economy and the pandemic's going on, and now we're at 7.9% on a 30 year fixed rate mortgage. Prime 3.25% today. Now it's eight and a half percent. So really big difference in environment. On the flip side, when you look at savers or people who are looking to earn interest on their money and keep their money relatively conservatively invested. A two year Treasury was yielding .16 as 0.16% three years ago. Today, it's yielding a little over 5% and the ten year Treasury was yielding under 1% 0.79. And today it's around 4.8%. So a really a big difference. And it depends on which side of the spending or borrowing or saving equation you're on. So a different environment entirely than three years ago. Laurence at Weiss, Hale, and Zahansky, you've made strategic moves in response to the Fed's rate hikes. Of course, they didn't raise it yesterday. Could you share some insights on how your firm has adjusted portfolios in anticipation of rising rates? Certainly, Wayne, you know, anticipating the rise in rates, which was, you know, well signaled early last year, we made some significant moves earlier this year reducing our rate or real estate investment trust exposure and reallocated those funds towards small and midsize or mid-cap stocks. This this strategic shift aimed at really adding diversity to portfolios and looking to enhance overall returns. Given some valuations in those sectors and currently we're really, you know, focused and laser focused on monitoring the environment and seeking opportunities to potentially expand our portfolio as bond exposure, especially in investment grade corporate and mortgage backed bonds. Laurence, What factor was the pandemic for the current interest rate scenario? Well, you know, it really played a huge part in impacting rates and kind of led us to where we are today. So if you think about what happened during the early stages of the pandemic, there was a very swift response, including drastic cuts to interest rates by the Fed to stimulate economic growth. There were also substantial financial supports from the government by injecting funds into business and individuals. Think about those stimulus checks and that fueled the rapid rebound of the U.S. economy, which was really positive at the time, given what was going on. But the rebound also brought us challenges such as increased demand, supply chain disruptions. Think about you can't get toilet paper, can't get, you know, a new car. And ultimately, that that leads to inflationary pressures when you've got increased demand, decreased supply. Yes, inflation has been a major concern. So how has the Federal Reserve respond and to these inflationary pressures and how has that impacted interest rates? Well, they've used the sledgehammer approach, which is the main tool which is raising interest rates, and they've done that by raising the federal funds rate, which is a pivotal tool and influencing interest rates overall. And the rate was elevated from nearly zero in 2020 to its current space of just over three for just over 5%. And as a result, inflation, as measured by the CPI, has shown significant signs of decline going from a high of nine down to just north of three over the course of a year. And the Federal Reserve aims to maintain an inflation target of around 2%. So their actions are really closely watched by investors. I and what you were talking about earlier was with what the Fed did or didn't do yesterday is worrying about what the Fed is going to do. Is interest rates going forward? Laurence, let me pull this from out of left field, because I know you'll have some thought about it, but this inflation problem that we've all noticed go to the supermarket or other places and prices are up. But it's not just a U.S. problem. It's a worldwide problem. Inflation is happening globally. So we've got the Fed to try to control that. They raise interest rates. What happens to the rest of the world? How do those countries control or try to control inflation? Most countries have some sort of central bank authority and they have similar tools to combat inflation. There are obviously countries where, you know, depending on the size of their economy and the ability of kind of the believability of their government and the value of their currency relative mostly to the U.S. dollar, at least a basket of international currencies. You know, they have varying degrees of ability to control, but then you have other factors. I mean, you think about something that has sort of resulted partially because of the pandemic, partially because of the various geopolitical challenges in the world, something we were referring to as globalization. You know, we've been in a phase for many, many years of globalization. You buy something at the store and it may have been parts made all over the world. That isn't necessarily the case anymore because we saw some of the risks to that during the pandemic. And we've also seen some of the risks if you have international relations with certain countries that are a bit challenged and wanting to, you know, not have that particularly critical component or part or technology manufactured elsewhere, so that globalization is also contributing to some inflationary pressures. I'll admit I hadn't really given that much thought until just now, and I threw out that question along the same lines here. We've got the 50 U.S. states and whatever territories we have, and the Fed is in charge of that. But you just take Europe, for example. It isn't like they've got one central body like the Fed that increases rates or keeps rates steady. I know they're in the Euro union over there, but by the same token, if Spain does it and France doesn't. Doesn't that have some sort of a degree of instability in the markets? They, you know, center on one currency? They actually do have a central bank authority. However, the EU is you know, you've got various levels of membership. You look at the U.K., they're not in the EU, definitely stepped away from that. So it does create different environments across the countries in Europe. You know, you look at an area of the world that is almost always some country is under some significant pressure down in South and Central America. And a lot of that has to do with the instability of the government. And you know, you look at how some countries have had these hyperinflationary environments, but, you know, the tools to to combat this are varied and imperfect, definitely. And, you know, the I guess the positive thing in the U.S. is we do have a central bank. They are very much have a hand in markets, particularly the fixed income market. And, you know, you have a government that as dysfunctional as people may think it may be, is it is able to, you know, institute policy. And we've been in an environment where they've been willing to spend to support the economy and provide some stimulation, which we'll talk a little bit more about as well. Well, I won't bother you by asking about who controls interest rates in Antarctica, but yeah, you sure have your finger on the pulse of what's going on here, what the pros and cons of rising interest rates. But deficit spending by the government's also been a key factor. How has this fiscal policy influence interest rates? And what are the implications? You know, yeah, it's a big topic. And, you know, thankfully, the U.S. has a huge capacity to borrow because we're the reserve currency the world and continue to be. And hopefully that remains that way. That's a definitely a good place to be in. And our economy is very strong and stable relative to the rest of the world. But, you know, this persistent deficit spending by the US government significantly impacted the supply side of the interest rate equation. If you think about how they've done that, if you need to to spend more, then you have to think about a consumer. You need to borrow money. Well, what does the government do? They issue Treasury debt to finance its operations, to finance that deficit, and that creates a substantial supply of these Treasury securities that they need investors to purchase to, you know, essentially lend the government money to spend. So the Federal Reserve previously a major buyer. Those securities, through programs like the quantitative easing program, has ceased those purchases, and it's actually unwinding their balance sheet. So people may have heard that is happening and that leads to an increase in supply and consequently higher interest rates to attract new investors. So just as there is supply demand dynamics for goods and services, there's also a supply and demand dynamics for U.S. Treasury debt. And that has an impact on where interest rates sit. So it's there's a multifaceted, complex and interesting challenge. But, you know, we're definitely navigating our way through it and the trend seems to be moving in the right direction. The economic repercussions of these rising interest rates are critical. Could you shed some light on the potential economic scenarios that might unfold due to this interest rate environment? Absolutely, Wayne. And the impact of rising rates can take various forms for sure. It could lead to, you know, kind of continued slow growth or a muddling economy or potentially a mild recession or even a deeper recession. Weiss, Hale and Zahansky through our investment committee, we foresee the US economy kind of narrowing the range of potential options, either for the US economy to muddle through with some slow growth and uneven growth or possibly entering a mild recession. So our strategic process remains flexible, ensuring that we adapt to evolving economic forces and make timely adjustments to our clients portfolios in response to that. And thanks in part to the inability of Congress to get anything done, we're only a couple of weeks away from a potential another government shutdown. What's the impact of a potential government shutdown on the market and on interest rates? You know, it's typically those are usually short term in nature and don't have any lasting impact, but they are highly disruptive to it, to investor psyche. So you usually do see some heightened market volatility. You know, if you think about kind of government policy as a whole and the fact that we have a divided Congress and, you know, they don't seem to be coming to consensus on much, if anything, as a investor, as a business owner, as an employer, you want certainty of policy, you want predictability, you want to be able to look out multiple years and say, I know the environment is going to be X so I can plan and make investments and buy machines or invest in properties or hire people, because I know what that environment is going to look like. And when you look at the federal government, in addition to various state policies, you know, when policy is in flux, it leads to uncertainty. And thus it means that investors are less certain of the future. And that's what you see with a lot of volatility. You know, layer in the Federal Reserve policy, they've been pretty clear with what they're doing. It's just really a question of when is the right environment going to stop rising and kind of stabilize which could lead to some really interesting opportunities based on where rates are now and where they could go in the future? And as we discuss the pros and cons of rising interest rates, let's just take a typical investor at Weiss, Hale and Zahansky and they have their portfolio, they got their diversified portfolio, they got their stocks, they got their bonds, they got their domestic, they got their national, that kind of stuff. And then they didn't do it yesterday. But the Fed increases interest rates. Does that have any direct or indirect impact on people's portfolios, assuming that they're not even touching it, they're just leaving it right there? Words, Ben. Well, this is one thing I know for sure. The market that the portfolio is going to go up or it's going to go down. So, you know, the direction is really dependent on, you know, really what not just Fed rhetoric is or their actions may be, but also, you know, some other factors corporate profits, you know, earnings coming in. We've seen that over the last few weeks impacting markets are geopolitical issues causing things. And I think, you know, when we look at allocating assets for clients, we take a long term strategic look. So there's a lot of noise continuously in the market. If you looked at historical events, either maybe even major ones, wars, you know, assassinations of world leaders, those kinds of things that pandemics that have shocked the market and the economy, You know, when you take a wide enough view, those are blips on a on a mountain of of, you know, growth. So it's really important to filter out the noise in the short term and align your portfolio strategy to, you know, your long term goals, which is which is what we remain focused on. So it's definitely, you know, like I said, it's going to go up or it's going to go down. We're fortunate the last couple of days it's gone up, but tomorrow it could go down. And we don't put a lot of credence into the day to day moves of the markets. We look more at longer term trends. And I'm a big believer in paper losses, despite all the fluctuations of the market through whatever reason, if you leave your money there and don't take it out, it won't have an immediate short term effect on you. It's the people that are going to try to take it out. For some reason, they're the ones who run the potential risk of losing money. What's your thoughts on quote unquote, paper losses? You know, it's yeah, I think you're right. Weighing in the fact that, you know, when you see losses on a statement, you're not realizing those losses unless you sell. So you know that that kind of leads right into what you were saying. However, there's some interesting things you can do if you if you really look at things from a strategic standpoint, if you have a loss in an investment and I think we've talked about this a little bit in some prior shows is if you have a loss in of an investment and there's a comparable investment that essentially does the same thing and plays the same role in the portfolio, you can potentially, if it's in a taxable account, take that loss and realize that loss by at the same time another investment that's nearly identical and use that tax loss to offset some gains or potentially lower your ordinary income. So there's some really interesting strategic things you can you can factor in. And that's what we do all the time, is look at how we can maximize client outcome, not just through investments, but through an overall strategic approach to looking at taxes and, you know, policy and, you know, retirement income and so forth. Man knows his stuff. Good answers from Laurence Hale. Thanks for listening to You and Your Money. Find even more episodes, videos and other resources at our website, whzwealth.com. Be sure to come back next week for more tips to help you live fearlessly and pursue your financial and life goals. Until then, live well. Weiss, Hale and Zahansky Strategic Wealth Advisors offer securities and advisory services through Commonwealth Financial Network member FINRA/SIPC, a registered investment advisor. Fixed insurance products and services offered through CES Insurance Agency. They practice at 697 Pomfret Street, Pomfret Center, Connecticut, 06259 and can be reached at 860-928-2341. Weiss, Hale and Zahansky Strategic Wealth Advisors do not provide legal or tax advice. The tenured financial services team strive to support clients and achieving their financial life goals. For more information regarding wealth management and customized financial planning with Weiss, Hale and Zahansky Strategic Wealth Advisors, please visit. www.whzwealth.com.