Don't Make This Big Investing Mistake Once Interest Rates Start Rising

Recommended by Dr. Michael White, Updated on November 23rd, 2020
Reading Time: 2 minutes

Don't look now, but the free ride is almost over for investors!

For years the Federal Reserve has arguably been more accommodative than it has been at any other point in its long history. Over the last few years the Fed has targeted a federal funds rate of 0.25%, leading to record-low 30-year mortgage rates that have held below 5% for more than three years.

Source: St. Louis Federal Reserve via Freddie Mac.

The end result has been a robust rebound in the housing sector, improved personal and commercial demand for loans -- which, on the business side of things, led to steady nonfarm payroll expansion -- and the ability for businesses and consumers to refinance their debts at more favorable rates.

The free ride is nearly over But we all knew interest rates couldn't stay near their historic lows forever. We also knew that the Federal Reserve's monetary stimulus program known as QE3 -- which involved purchasing long-term U.S. Treasury bonds to push down yields (remember, bond prices and bond yields have an inverse relationship, so purchasing bonds should work to push yields lower) and buying mortgage-backed securities to stabilize the housing sector -- would eventually come to an end.

Given the Fed's latest commentary via its last meeting minutes, it would appear that the Federal Open Market Committee is on pace to end QE3 by October and could be on pace to boost the federal funds rate from its historic lows in early to mid-2015.

The move itself is a bit of a push-pull for investors .

Source: Robert Clemens , Flickr.

On one hand, the end of QE3 signifies that the U.S. economy no longer needs its training wheels and has decisively put the Great Recession in the rearview mirror.

Conversely, higher interest rates aren't normally welcome. As the federal funds rate rises, other lending rates are likely to follow, including mortgage rates and potentially credit card APRs. In other words, this means consumers who are taking out new loans or who have variable-interest-rate debt could be primed to see their interest owed shoot higher.

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Don't Make This Big Investing Mistake Once Interest Rates Start Rising

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