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Will interest rates stay higher for longer?

Key takeaways

  • The Federal Reserve is leaving interest rates alone for now.
  • The Fed is still concerned about inflation and is keeping rates high to help slow it down.
  • The current monetary policy environment may offer attractive opportunities for investors.

The Federal Reserve is trying to slow inflation down while keeping the economy growing. That's why the Fed decided at its March meeting to again keep its most important interest rate in a range between 5.25% and 5.50%.

The decision does not mean the Fed has become less concerned about inflation. Fed Chair Jerome Powell has said that inflation threatens the financial wellbeing of investors and consumers alike, and the Fed remains committed to slowing it, eventually down to around 2%. Powell says recent inflation data tells the central bank's leaders that it's not time to cut rates yet, but that 3 rate cuts are still likely this year.

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What the Fed's policies may mean for investors

The clearest beneficiaries of current interest rate policy have been those who invest in bonds primarily for income or in other fixed income securities such as CDs. Relatively high rates have increased the appeal of fixed income investments as both sources of income and preservers of capital in portfolios. Those investors may want to consider longer-maturity investments to lock in today's attractive opportunities for income before rates move lower.

What eventual rate cuts might mean for stocks

The prospect of eventual rate cuts could continue to benefit stocks in the short- to medium-term. Since the Fed's current monetary policy tightening cycle began in 2022, stocks have followed their historic pattern in rising-rate environments: struggling at first and then recovering much as they had during previous rate-hiking cycles, as shown in the chart below.

Source: Fidelity Investments (AART) as of 12/31/2021. Stock performance represented by S&P 500.

Jeff Moore, manager of Fidelity Investment Grade Bond Fund (FBNDX) says that the Fed's current policy stance could benefit stocks and high-yield bonds as well as investment-grade bonds through the rest of the year.

For more on stocks, read Viewpoints: Why the market could keep rising.

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This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

The S&P 500 Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance. Indexes are unmanaged. It is not possible to invest directly in an index.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Like all fixed income securities, CD valuations and secondary market prices are susceptible to fluctuations in interest rates. If interest rates rise, the market price of outstanding CDs will generally decline, creating a potential loss should you decide to sell them in the secondary market. Since changes in interest rates will have the most impact on CDs with longer maturities, shorter-term CDs are generally less impacted by interest rate movements.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

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