Investing In A Rising-Rate Environment

The Federal Reserve raised the federal funds interest rate three times in 2017 from 1.00% to 1.50%, signaling an environment where some believe rates will continue to rise. This is potentially good news for investors who may feel uneasy with the volatility of the stock market. An investment in a Certificate (CD) can deliver liquidity, it can protect principal, it can add diversification to a portfolio, and it can be a welcome refuge for assets if stocks enter a bear market. Another added benefit is The National Credit Union Administration (NCUA) can insure up to $250,000 of the balance of a CD, making it a safer choice.

However, investors may be weary of opening a CD believing that another rate increase might be right around the corner. During times like these, it is worth considering alternative options such as Jump-Up CDs, which can combat the fear of missing out on a higher rate.

Variable/Jump-Up CDs

If interest rates do continue to rise steadily in the next 2-5 years there are some CD investing choices that might result in a higher yield. Variable rate or Jump-Up Certificate (CDs) could be a good option for consideration, as their annual percentage yield can be adjusted upward in response to rising market rates. This makes opening a CD today less risky because you are not locked into that rate for the term of the CD. If rates rise, you can choose to convert your CD to a higher rate offered by your financial institution. Jump-Up CDs can provide a best of both worlds scenario with steady and safe returns today and the possibility of higher rates in the future.

Another option to consider in a rising rate environment is a laddered CD strategy. CD laddering consists of dividing the money you would invest in one CD among a few different CDs with staggered maturity dates. This allows you to replace maturing CDs with new ones at (hopefully) higher rates of return.

The Outlook

According to The Balance, The Federal Open Market Committee (the monetary policy arm of the Federal Reserve System) expects to increase the interest rate to 2.1% in 2018, 2.7% in 2019, and 2.9% in 2020. The federal funds interest rate influences short-term interest rates. These include banks’ prime rate, the Libor, most adjustable-rate and interest-only loans, and credit card rates.

During times of anticipated Fed’s rate hikes, investing in Jump-Up CDs that can be adjusted upward in response to rising market rates are well worth consideration.