3 Ways to Profit When Market Rates Outpace The Fed

Treasury bond, mortgage and bank rates are rising due to inflation. Learn how to profit when the federal funds rate doesn't keep pace with bank rates and mortgage rates.
By Richard Barrington
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The Federal Reserve announced on January 31 that it was leaving short-term interest rates at their current levels at least until its next meeting, scheduled for March 20 - 21. Consumers should take note, however, that market rates are not showing as much patience as the Fed in the face of rising inflation. Treasury bond, mortgage and bank rates have all been headed higher.

No reason to raise federal fund rates now

It is no surprise that the Fed took no action in the most recent meeting, having just raised rates in its mid-December meeting. While the Fed has stated a long-term intention to restore interest rates to more normal levels, in the absence of any pressing economic developments its preference is to do so gradually. Letting a few months go between rate increases is likely to be less disruptive to the economy and the financial markets.

The one factor that may pressure the Fed to raise rates more quickly is inflation. While the Fed's statement at the conclusion of today's meeting took the optimistic view that prices rose moderately over the past year, it can't have escaped their attention that the pace of inflation is quickening. For example, while the Consumer Price Index rose only 2.1 percent in 2017, 1.7 percent of that happened in the last six months of the year.

In other words, moderate inflation has given the Fed the luxury of taking its time in raising rates, but that may be changing. Certainly, the public markets have noticed and their rates have responded accordingly.

Market rate surge gives consumers an opportunity

Yields on US Treasury investments have risen in recent months, as have mortgage and bank rates. Under the circumstances, here are three moves for consumers to consider:

  1. Bonds and CD rates
    Investors may want to shorten maturity targets on income investments like CDs and bonds. Shorter-term CD rates may be lower than longer-term ones, but shorter CDs make money available for reinvestment more quickly which is an advantage in a rising rate environment. As for bonds, longer-term bonds react more negatively to rising rates than shorter-term securities.

  2. Mortgage rates
    Mortgage rates have risen by 37 basis points since bottoming out in September, with 20 basis points of that increase occurring in the past three weeks alone. Anyone planning a decision to buy a home or refinance a mortgage might be wise to accelerate their decision-making.

  3. Savings rates
    Savings and money market rates are still low, but the most recent MoneyRates America's Best Rates survey found that some banks have broken out of the pack and are now offering deposit rates well in excess of 1 percent. A rising rate environment can be an especially rewarding time to do some rate shopping.

It is not a contradiction for market rates to be rising while the Fed stands pat. In fact, it is helpful to the Fed because it makes their moves less disruptive. What this means, though, is that waiting for the Fed before you make your decisions concerning interest rates could cost you money.

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