What are Interest Rates?

Interest rates get a lot of press, but what do they actually mean to investors? Probably not as much as we are led to believe.

The Fed cut interest rates. The Fed raised interest rates. Up and down it seems, and it’s often made out to be a big deal. But what do rising or falling interest rates mean when we’re talking about an investment portfolio? That’s up for debate.

The interest rate is the cost of borrowing. So if a business were to borrow $100,000 at a rate of 2%, they would need to pay back an additional $2,000 above what they borrowed. For obvious reasons, a lower interest rate would, theoretically, encourage businesses to borrow more money which they would then use to expand or grow. In fact, the Fed typically cuts interest rates to stimulate the economy and pull the country out of recession, or in rare cases fend one off.

The Fed? Interest rates are set by The Federal Reserve, which we refer to most often as “the Fed.” The Fed was established back in 1913 to create a financial system that could stabilize price levels and maintain interest rates. It’s America’s central bank.

But do interest rates impact investing portfolios to any great degree?

High interest rates aren’t usually a good sign for investments (with some exceptions). But it’s never worth a panic, because though interest rates will rise, increases are usually moderate, occur over time, and rarely go as far as most people expect. So while it’s important to keep in mind the impact higher rates have on your holdings, it’s also important to remember that at the end of the day, not that much is going to change. A high quality company that earns reliable income and passes it on to investors is always going to be a good investment, regardless of interest rates.

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