Fed Interest Hikes: 5 Things Investors Need to Know

By Dan Raju, CEO of Tradier

The Federal Open Market Committee (FOMC), which controls monetary and interest rates policy, recently increased the federal funds rate by 0.25% points, now at a range of 0.25% to 0.5%. After months of chatter, the highly anticipated interest rate hikes surprisingly reacted positively in the market. While most took the hikes with stride, it did come as a shock to those who unrealistically hoped the country could hang on to the low interest environment when we are seeing 7.9% inflation. For retail investors, interest rate hikes could mean changes to mortgages, stocks, crypto, and options. In the endemic phase we have entered in, it is now time to return to normalcy, which will benefit retail investors across all sectors.

1. Will my mortgages become higher now? Will home equity lines of credit and credit card interest also become more expensive?

Simply yes, but that is not necessarily bad news. Inevitably, mortgage rates will rise as interest rates soar. However, federal fund rates are not directly linked to mortgage rates as most retail investors believe. In fact, it is the ten-year treasury yield that mortgages are directly connected with. Since the ten-year treasury yield is shooting high and capital markets are pricing in the rate factor, mortgage rates will rise too. Historically, these to tend to move in a very similar in direction. Let’s not forget that despite all the chatter, the current mortgage interest rates are still relatively low. This is presenting an ideal time to act on any mortgage plans now as we foresee at least three additional interest rate hikes in the next twelve months.

Home equity lines of credit (HELOC) and credit card debt will cost you more immediately and directly, with banks reacting quickly by increasing their prime rates. The retail investors with HELOCs and credit card debt will pay more. While a painful sting now, we should not loose sight of the incredibly low rates compared to historical averages. Now is the time to lock in rates before the upcoming federal hikes. A direct result of this already is increased activity around cash-cut refinancing from homeowners before additional prime rate increases kick in.

2. What about my savings accounts? Will I earn more returns?

Yes, but in due time. In general, higher interest rates will offer higher returns on savings and money market accounts. Although exciting, this process will be slow as banks will drag their feet as much as possible and only then will they slowly adjust at an incremental pace. Retail banks rushed paying nearly zero rates in March 2020 instantly when the Fed cut rates but will likely delay paying higher returns back to consumers.

3. What about stocks?

There is no doubt that low interest rates have been a blessing for stocks. The Fed has kept rates so low for such a long time. This bloated stock prices and almost made them look much more attractive than bonds and income generating CDs. The interest rate hikes by the Fed will remove some bloat in the way stocks are priced and will reign in some volatility. This will attract long terms investors, in addition to active traders, who sit outside the market when they see elongated volatility.

4. What about options?

Changes in interest rates directly affect option pricing in addition to a multitude of other factors. In general, when interest rates increase, call options benefit while put option prices are impacted negatively. Interest rate hikes tend to create room for a plethora of strategies that active traders gravitate towards. This has led to a graduation effect in the market as retail investors have shifted towards options trading in search of better tools and data than ever before. Active retail traders will continue to engage and create option trading at volumes in 2022.

5. What about crypto?

Traditionally, higher interest rates lead to a lower appetite for higher risk assets, like crypto. As we have recently seen, the hype around interest rate hikes have caused cryptocurrency prices to hit record lows. The crypto market will face a short-term disruption with a decrease in any incentives from crypto brokers to retail traders. However, this will be nothing more than a brief hiccup, as this sector is in a juncture where many factors are at play than just interest rates. This will be an interesting time for the crypto market, as 2022 brings a wave of regulation to the space. Crypto continues to have greater adoption both institutionally and amongst the larger active trader community. Crypto is moving out of the realm of being a niche play for young millennial investors to being a driving interest by active traders. As a result of this, I expect crypto to be a hot market in 2022 and the increased volume due to greater adoption will align crypto prices directionally with stock market movements.

Dan Raju is the CEO of Tradier, the essential infrastructure fabric that powers over 250 investing platforms globally and serves some of the most active traders in the market.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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