It’s all but done: The Federal Reserve is poised to raise interest rates starting at its March 2022 meeting. After months of reducing liquidity by tapering bond purchases, the nation’s central bank is looking to lift the benchmark Fed funds rate, too, increasing the cost of borrowing for banks across the country.
It’s likely not just a one-time increase, either. The odds are high that the March rate hike will be the first of at least several increases this year, if not six or seven – depending on which forecast you believe.
These potentially higher rates could play out on stocks, cryptocurrency, commodities (such as gold and oil), as well as many other investments over the rest of this year and into 2023. But what can investors expect and how long will the rising rate environment impact markets?
Prospect of higher rates already creating higher volatility
While the Fed hasn’t yet raised rates, it’s easy to spot when markets really sat up and took notice that the central bank wasn’t kidding that it was about to tighten monetary policy. It was November 2021 when cryptocurrency and many of the riskiest stocks peaked.
“The stock market is forward looking, so just the expectation of higher rates has had an impact,” says Caleb Tucker, director of portfolio strategy at Merit Financial Advisors in the Atlanta area.
Still, the broad-based Standard & Poor’s 500 Index closed the year out near its all-time highs. From there, though, it’s been mostly downhill for the index, and more so for riskier investments. It’s been a similar situation for the Dow Jones Industrial Average and the Nasdaq Composite.
“From the beginning of 2022, stocks have pulled back and interest rates moved higher in anticipation of coming Federal Reserve interest rate hikes to corral inflation,” says Greg McBride, Bankrate chief financial analyst.
The S&P 500 is down about 12 percent since the start of the year, while the tech-heavy Nasdaq Composite is down even more, 18 percent, and the Dow Jones Industrials are off 10 percent or so. Still-riskier investments have fared much worse, and the declines show few signs of slowing.
“Assets that have benefited most from ultra-low interest rates – think high-octane growth stocks with earnings well off into the future and non-cash-flow-generating assets like cryptocurrencies – have been most susceptible to a pullback given the prospect of higher interest rates,” says McBride.
For example, high-growth tech stocks such as Cloudflare and Datadog have fallen about 58 percent and 35 percent, respectively, from their 52-week highs just a few months ago.
Top cryptocurrency Bitcoin has fallen about 44 percent from its all-time high in November. The second-largest cryptocurrency Ethereum has seen a similar drop, …….