The Federal Reserve has increased interest rate by 0.25% on 17 Mar 2022.
There will be potentially 6 more interest rate hikes in this year.
Let me share on 5 reasons why I am happy about it.
1. No loans
I do not own any home nor car loan hence will not be affected by greater financing costs for home and car mortgage over the next few months due to rising interest rates. Even though I use credit cards frequently for payments of food and groceries, I always pay up the due amounts on time and will not incur any interest expenses.
2. Higher interest rates on savings
I look forward to enjoying higher interest rates on savings, emergency funds and cash in savings and fixed deposit accounts with the banks. As I am relatively conservative and stashed away a decent proportion of cash away in banks to be eroded by inflation first before investing spare cash in riskier equities and assets, it is time for my idling money to finally work harder to earn better yields.
3. Stocks' positive correlation with Interest Rates
Even though the stock markets may undergo short-term weakness before interest rate hikes, historically the stock markets do well when interest rates rise. Hence we should not be too bothered about rising costs of businesses or decreasing valuation of growth stocks in high interest rate environments. As long as we invest in great income-producing businesses and real estate assets, we will do well throughout the period of risking interest rates and in the long-term.
4. Higher bond yields
As bonds are instruments for investors to lend our money to companies or governments, we will be able to earn higher yields from investing in bonds be it treasury bills, Singapore savings bonds or corporate bonds issued by companies. This will be another great investment option for us to park our idle funds. Higher interest rates also make bond prices decline and become more attractive.
5. Interest rate controls Inflation
Theoretically, interest rates are tools used by central banks to manage inflation. With sky high inflation and recovering economies at present, the prices of commodities, food, properties, cars and luxury items are rocketing. Hopefully, rising interest rates will help to curb spending and cool down "interest" of consumers in splurging on goods and services. This may come at the expenses of economic growth though, but at least keep inflation under control to a limited extent.
As always, stay safe and remain strong.
2 comments:
With regards to savings, local banks won't raise interest for a long time even if the Fed funds rate hits 3%.
Savings & spare cash will have to go into T-bills, money market funds, and SSBs to enjoy the rising interest rates.
Been there, done that over the last 30 yrs (SSBs did become popular during the 2018 hikes).
Quite true. For normal savings accounts, the "increase" in interest rates will be negligible. However, for bonds, money market funds, fixed deposits, we should expect to see some increase soon.
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