With interest rates expected to remain elevated compared to pre-pandemic levels, savvy investors should be cognizant of the current financial climate and the steps they can take to mitigate risk. From optimizing fixed income allocations to prudent cash management and crafting a summer budget, here’s some tips on navigating the current landscape for financial success.

Interest Rates Remain Unchanged

At their last meeting, the Federal Reserve kept the target range for the federal funds interest rate unchanged at 5.25% to 5.5%. While Fed Chair Jerome Powell indicated the central bank does not expect to raise rates further this year, he did not provide clear signals on when they might start cutting rates. [i]

While most Fed officials still project three 0.25% rate cuts later in 2024, they want to see inflation resume a downward trend first. Powell reiterated the Fed’s stance as “patient” and their policy as “higher for longer” until inflation shows a sustained decline toward their 2% target. The Fed believes there is potential for rate cuts in the second half of 2024 if inflation cools, but the outlook depends on upcoming data.

What can you do?

As the Federal Reserve maintains its stance on interest rates, investors are faced with a landscape oddly marked by both stability and uncertainty. Strategic financial planning can help you capitalize on the benefits of high interest rates while also protecting against potential downsides.

Additionally, as summer approaches, it’s smart to keep an eye on your spending to ensure you’re on track with your goals and to also avoid additional credit card debt. Schedule a meeting with your advisor to discuss if any of these methods are right for you:

Adjusting Fixed Income Allocations

Consider increasing allocations to shorter-duration bonds, which are less sensitive to rising rates.

• Explore opportunities in floating-rate instruments like bank loans, whose yields adjust with rate changes.
• For income needs, look to high-quality corporate bonds and Treasuries now offering higher yields.[ii]

Reassessing Stock Valuations

Higher interest rates can make future cash flows less valuable, thereby impacting stock valuations.

• Value stocks and sectors like financials may become more attractive relative to growth stocks.
• Sectors like technology that rely more on future earnings could face greater headwinds.

How to Diversify Across Asset Classes

In a higher rate environment, investors should ensure proper diversification:

• Consider increasing allocations to asset classes like commodities, real estate, and alternative investments that can provide inflation protection.
• Maintain discipline in rebalancing portfolios to target asset allocations as markets fluctuate.

Managing Cash Prudently

With higher yields available on cash instruments, investors should:

• Explore short-term bond funds, money market funds, or high-yield savings accounts for cash holdings.[iii]
• Avoid holding excess cash given the opportunity cost of lower returns.

Monitor your summer spending

Additionally, with summer vacations on the horizon, be mindful of discretionary spending which could impact your budget and savings goals. It’s so easy to splurge in the summer and “just charge it.” But credit card interest rates are directly impacted by the Federal Reserve[iv], and so in these times of high interest rates be mindful of what you’re spending.

Here’s a few tips on creating a summer budget:

• What are your responsibilities? These can include spikes in your electrical bill, increased food spending, and incidental costs around personal commitments like weddings, reunions, and parties. If any of your plans involve travel, make sure to plan ahead, as last-minute changes can affect your wallet in unexpected ways.
• What do you and your family want to accomplish this summer? Make sure you leave room in your budget for fun things: trips to amusement parks or zoos, and park or pool passes. Are there any outdoor projects you want to tackle, like enhancing your landscaping or replacing your driveway? Do you have money set aside for car repairs—especially if you’re planning a road trip?  
• Find budget-friendly activities while still making memories. Many communities offer affordable (and sometimes free!) outdoor concerts, festivals, and farmers markets. Check with your city hall or local library and see if they publish an event calendar—keeping your kids entertained may be easier than you think!

Summertime is filled with opportunities for fun—and unexpected expenses which can derail your long-term goals. Planning ahead and monitoring your spending is key to staying on track. It’s completely possible to have a fun and memorable summer without disrupting your budget too much.

Schedule a Meeting with Your Advisor

Whether you’re looking for strategies on how to take advantage of high interest rates, or if you simply want to make sure your summer plans are in line with your budget, be proactive and check in with your advisor. They can review your cash flow and help you position your portfolio to navigate—and potentially capitalize on—this current higher interest rate environment.

---

[i] https://www.schwab.com/learn/story/fomc-meeting

[ii] https://www.usbank.com/investing/financial-perspectives/market-news/how-do-rising-interest-rates-affect-the-stock-market.html

[iii] https://www.kiplinger.com/economic-forecasts/interest-rates

[iv] https://finance.yahoo.com/personal-finance/how-the-fed-affects-credit-card-interest-rates-125601157.html