Ever since the Federal Reserve began slashing its benchmark interest rate in response to the 2008 financial crisis, investors have wondered when rates would start to rise. With the stock market consistently reaching record highs over the past two years and inflation rising out of control, some Fed officials believe now is the time. Indeed, the Federal Open Market Committee (FOMC), the monetary policymaking body of the Federal Reserve System, reiterated what it previously stated during their January meeting: it will soon be appropriate to raise the target range for the federal funds rate.
Americans who are saving and preparing for retirement are concerned about when these rate hikes will begin, how many times rates will rise, and how rate increases will affect their retirement plans. While the next FOMC meeting is scheduled for March 15-16, some experts believe that they could make an announcement on rate hikes even sooner. Either way, rate hikes are likely to begin in March and global banks are predicting there will be anywhere from 5 to 7 rate hikes over the course of 2022.
How do Interest Rates Affect the Stock Market?
The Federal Reserve has traditionally used interest rates to control inflation by expanding or restricting access to loans. When the Fed lowers their benchmark interest, the cost to borrow money decreases. By expanding access to credit, the Fed makes it easier for people to buy houses, automobiles, and other big-ticket items. When the stock market falls, lowering interest rates can boost activity and rebound the market and the economy from a recession. The stock market crashes that we experienced in 2008 and 2020 were some of the worst in history, which encouraged the Fed to keep interest rates at historic lows for more than a decade. This strategy, along with the bond-purchasing economic stimulus program known as quantitative easing, artificially propped up the stock market, while simultaneously creating the unintended consequence of rampant inflation.
Inflation rose rapidly in 2021 and currently sits at a 40-year high of 7.5%, according to the latest Consumer Price Index report. The Fed responded by tapering their quantitative easing program and are expected to raise interest rates. Unfortunately, this will likely cause record stock market increases to fall, hurting investors in the process. The stock market briefly entered correction territory this year, which is a bad sign for investors who have their retirement invested in stocks, bonds, mutual funds, and other securities-based investments.
In the process of providing aid to keep our economy afloat, the Fed has inadvertently created a massive asset bubble that has grown since 2008. Interest rate hikes in 2022 could finally be the needle that pops the asset bubble. In fact, markets dropped in response to recent statements made by Fed officials. If we do experience a stock market crash this year, those invested in high-risk securities could see their savings wiped out. Stocks, bonds, mutual funds, and volatile cryptocurrencies are all subject to significant risk and their value could drop significantly with the stock market. If you are in or near retirement, such a drop may force you to delay your retirement or live on a tighter budget in your golden years.
Safe Retirement Investing Alternatives
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