Higher interest rates can have a disastrous effect on retirement funds. This is because many retirement funds are driven by stock performance.7 Also, higher interest rates can result in less money available for consumer spending. Some market watchers believe that higher interest rates send gold prices lower.
“The Federal Reserve is answerable to no one.”
The Federal Reserve is raising interest rates at a blistering pace — sending shock waves through the economy. In the span of a few months, rate increases have turned optimism to outright concern. With GDP now declining in consecutive quarters, one would think the Fed would pause. However, in their July meeting, they called for more aggressive hikes through the end of the year.The Fed’s plan to gamble with the country’s economic future may not pay off. In June, the Fed raised its benchmark interest rate by 75-basis points for the first time in nearly three decades. Despite that record increase, inflation still went up to a new high of 9.1%. And on July 27th, the Fed raised rates another 75-basis points. Pressed over whether central banks now had a better grasp of price-setting dynamics, Mr. Powell responded, “We now understand better how little we understand about inflation.”1
Why is the Federal Reserve Acting Now?
The answer is record inflation. The Federal Reserve once called inflation ‘transitory’. It was a pandemic hangover that would work itself out. Then, they called it ‘elevated’ and issued average interest rate hikes. After inflation hit a 40-year high of 8.6% in May, Federal Reserve Chairman Powell vowed to tame it at all costs. He declared, “inflation is much too high.”2There has been a perfect storm of events fueling the skyrocketing inflation. The war in Ukraine, supply chain snarls and pent-up demand from the pandemic are all contributors. The Biden administration may deny it, but massive government spending during the pandemic is a primary cause of today’s oppressive inflation. 3This is not the first time the Fed has caused inflation. The U.S. economy experienced four recessions and two major energy shocks between 1965 and 1982. It saw inflation balloon from around 1% to over 14%. Economists agreed that Fed policy contributed to the high inflation.4The Fed is finally owning up to the problem they helped create. They will now do whatever it takes to bring inflation under control.The Fed’s only real tool to fight inflation is raising interest rates. Raising rates causes higher lending costs. This makes businesses and consumers borrow and invest less. Businesses may stop hiring or lay off workers. When consumers have less discretionary spending money, businesses’ revenues and profits decrease. Higher interest payments also encourage people to save money. This reduces the supply of money in circulation. These factors can lower inflation and moderate economic activity—a.k.a. cool off the economy.Rising interest rates slow economic growth by design. The fear is that the Fed’s ‘stop inflation at any cost’ plan will do more than slow growth. It may bring the economy to a dead stop, slamming it into recession.The chance of recession rises with every interest rate hike. According to a recent Reuters poll, economists give a 40% chance of the US entering a recession, up from 25% in June. 5 Meanwhile, Citigroup forecasts the odds of a global recession are 50%.6 The possibility of avoiding a recession and achieving a ‘soft landing’ is looking slimmer by the day.Higher interest rates can have a disastrous effect on retirement funds. This is because many retirement funds are driven by stock performance.7 Higher interest rates can lower earnings and stock prices. If it looks like a company is cutting back on its growth or is less profitable, its stock price will most likely go down. Also, higher interest rates can result in less money available for consumer spending. Reduced consumer and business spending can both lower the value of a company’s stock.If the stock prices of enough companies go down, then key indexes, such as the Dow Jones Industrial Average and S&P 500, can also go down. Index funds, essential components of many retirement accounts, go down as well.Used by retirement funds to build wealth, growth stocks suffer tremendously from interest rate hikes. They rely heavily on capital for future business expansion. When that capital becomes too expensive, investors leave them for safer assets. In April, interest rate hikes were a contributing cause to the NASDAQ losing over $1 trillion in value. 8 And after the rate hikes in May, The Dow Jones Industrial Average fell 1,063 points. 9
How to Defend Against Spiking Interest Rates
The best way to mitigate impact of rising rates is to diversify your asset allocation. But this economy is upending traditional diversifiers like bonds and savings.Bonds are not proving to be the best hedge against rising interest rates. They are very sensitive to interest rate changes. The market prices of existing bonds immediately decline when rates rise. The price drop makes them more competitive against new bonds with higher interest rate payments. In March, the bond market suffered its worst quarter in more than 40 years.” The poor performance of bonds has robbed investors of a traditional haven at a time when stocks and many other markets have been swinging sharply, thanks to factors including the Federal Reserve’s first interest-rate increase since 2018.” 10A potential benefit of rising interest rates is that savings accounts and certificates of deposits increase their return. But investors must keep inflation in mind. The inflation rate can outpace the savings rate. And with today’s high inflation, consumers should do the math and see if they are actually saving anything at all.
Against soaring inflation, record interest rates and an unofficial recession, gold is proving to be a safe haven asset.
Some market watchers believe that higher interest rates send gold prices lower. Since gold is a non-interest yielding asset, rising interest rates can make it seem less appealing. But a long-term look through historical data reveals that no relationship exists between rates and gold. Like most basic commodities, it is a function of supply and demand in the long run.A study of the massive 1970s bull market for gold reveals that gold rose to its all-time high price of the 20th century when interest rates were skyrocketing. By 1980, interest rates had more than quadrupled, rising as high as 16%. In that same period, the price of gold mushroomed from under $50 an ounce to a once unimaginable price of $850 an ounce. The price of gold is ultimately not a function of interest rates. 11A toxic blend of pandemic, global conflict and reckless government spending has created the highest inflation in 40 years. Recognizing the threat of inflation, the Federal Reserve has vowed to raise interest rates as fast and as high as they must to bring it under control. They will do this even if it means collapsing the economy, creating a recession, and wiping out retirement funds. Investors interested in protecting their portfolios should consider precious metals. A Gold IRA is specifically designed to shield 401(k)s and IRAs from the ravages of high interest rates. You can contact American Hartford Gold to learn more today.
Max Baecker is the COO of American Hartford Gold, the nation’s largest retailer of gold and silver. He is committed to American Hartford Gold’s mission of helping clients achieve long-term financial security by providing them with unparalleled knowledge on precious metal markets and products.
Max specializes in helping clients build long-term wealth through the security and stability of precious metals. Under his guidance, American Hartford Gold has delivered over $1 billion in precious metals to thousands of satisfied clients. American Hartford Gold is the #1 ranked gold company in the prestigious Inc. 500 2021 List of America’s Fastest-Growing Private Companies. It holds an A+ Rating from the BBB and a 5-Star Rating on Trustpilot with thousands of 5-star reviews. AHG offers investment-grade gold and silver coins and bars at competitive prices. Clients also benefit from its buy-back commitment with no back-end fees. American Hartford Gold is the only precious metals company trusted and recommended by Bill O’Reilly and Lou Dobbs. To learn more, visit American Hartford Gold.