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Interest Rate Explainer

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Whenever you listen to financial experts, there’s one topic that will almost always come up: interest rates. But what do interest rates have to do with your portfolio and wealth?

It turns out, a whole lot.

When you hear the term “interest rates” on the news, it’s usually referring to the Federal Funds Rate, which is the rate that banks use when borrowing from one another. This interest rate is the benchmark set by the Federal Open Market Committee (FOMC), and factors in current economic conditions like inflation, employment, and GDP growth.

But why should you care about the Federal Funds Rate?

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Investment Myths Vs. Realities

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Geopolitical events and earnings reports drive long-term investment returns, right? 

Think again. 

Global occurrences like the Cuban Missile Crisis and Iraq War have only resulted in short-term changes for the market, and not the long-term effects that investors might have imagined. (1)  

This is just one of several key factors that don’t play a role in your long-term returns (or as much as one might think). But most investors still overvalue the importance of these political occurrences on long-term returns. So what then?

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Fed Watch & Gathering Clouds?

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Clouds may be gathering. Should investors be worried about a storm?

Let’s look at some factors that could trigger a market selloff in the weeks or months ahead.

(Note: I'm not saying a selloff is definitely going to happen—I want you to be prepared if it does.)

Factor #1: Stocks are trading near record highs

Stocks have posted multiple record closes, and the S&P has been trading well above its 200-day moving average. (1, 2) When stocks repeatedly push new highs, it’s not uncommon to see a pullback as traders take profits.

Factor #2: Investors are watching the Fed like hawks