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  • Writer's pictureIshfaaq Peerally

Preparing for Higher Interest Rates

It is expected that the Federal Reserve System will raise interest rates in 2022. It will also start tapering of its balance sheet.

The Fed is unlike any other central bank. It has a dual mandate: to keep inflation low and the unemployment rate low. With high inflation, the Fed is forced to raise interest rates and sell assets on its balance sheet to lower the money supply.

Will tapering and higher interest rates cause a market $SPX500 crash? Normally, the market has a small selloff with higher interest rates but then quickly recovers. The real effects of higher interest rates can only be seen after a few years. It all depends on opportunity cost. If interest rates go to 1.00%, stocks are still a much better investment than bonds $TLT . Only a drastic increase in interest rates crashes the market. There is, however, a rotation from growth stocks to value stocks.

Stocks that normally win the most from higher interest rates are banks $JPM and other financial stocks.

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