You Can’t Control the Federal Reserve, but You Can Control What You Do About It

For roughly a decade, most investors hardly thought about the Federal Reserve. The central bank kept rates near zero for several years following the great financial crisis, and the stock market flourished.

However, over the last couple of years, the Fed has taken center stage. Following the economic reopening, inflation soared due to factors including excess savings from government stimulus, labor shortages, and supply chain delays.

After first dismissing inflation as transient, the Fed began ramping up the benchmark fed funds rate in March 2022, lifting it roughly 5 percentage points in a year, the fastest it’s raised rates in at least a generation. The benchmark rate is now in a range of 5.25% to 5.5%, and that rate strongly influences key interest rates like yields on Treasuries and mortgage rates. As interest rates have risen, stocks have fallen and the major indexes are still well below the peaks set in late 2021 and early 2022. 

The Fed is still exerting a lot of control over the stock market, but you don’t have to spend your investing energy anticipating interest rates and the Fed’s next move. Focus on what you can control while the Fed drama plays out. Here are a few easy moves you can make.

Avoid interest rate risk — or embrace it

One of the lasting lessons from the Fed’s rate hike campaign is that interest rate risk can become real very fast. Rising rates were part of what tipped several banks over the edge during the spring as higher rates made the bonds on their balance sheets worth less.

It’s also crushed the real estate sector as mortgage rates have soared and the housing market has slowed considerably. That’s led real estate stocks like Redfin and Opendoor to plunge, and it’s also put pressure on some commercial real estate stocks. Even home improvement and home furnishings retailers have been hit. 

However, there are plenty of sectors you can hide out in if you don’t want to be exposed to interest rate risk. The easiest ones are probably recession-proof sectors like consumer staples, healthcare, and utilities, but there are plenty of stocks outside of those areas that could offer a good risk/reward basis and whose businesses have no real interest rate risk.

Take Roku (ROKU 1.64%), for example. The leading streaming distribution platform has been beaten down by the broader weakness in the streaming sector and the slowdown in the digital advertising market, but the stock could rally as advertising growth returns.

Alternatively, you could take the opposite approach and embrace high interest rates. Big banks like JPMorgan Chase, Wells Fargo, and Citigroup just posted strong profit growth in their third quarter, aided in part by higher interest rates, which allow them to collect more interest on loans. There are also stocks whose business models allow them to earn interest income on the money they hold before they disburse it, such as Airbnb and Bill Holdings.

Enjoy the yield

If you want to make things easy on yourself you can buy Treasuries, park your money in a high-yield savings account, or buy a certificate of deposit. 

Two-year Treasuries are yielding about 5% right now, and even the yield on the 10-year Treasury note is at 4.6%. If you buy Treasuries, another advantage is that they’ll increase in value if interest rates go down.

There are also high-yield savings accounts where you can earn more than 5%, and you can find credit unions that pay even more than that, as do some certificates of deposit (CDs).

Think long term 

The current interest rate environment may not last as long as you think, or at least the market headwinds may not. 

The Federal Reserve expects rates to come down over time. It’s targeting a long-term fed funds rate of 2.5%, which should help support stock market valuations, bring down borrowing rates for things like mortgages, and give the economy a boost more broadly.

During uncertain times, it’s sometimes best to remind yourself that volatility is a normal part of the stock market, but over the long term, you’ll almost certainly end up ahead if you stay invested.