Fed Funds and Bond Interest Rates

Fed Funds and Bond Interest Rates

by Valerie L. Peck, CFP®

The Fed has kept interest rates at the zero lower bound since the pandemic began.   They announced this week that they expect interest rates to begin to rise again sometime in 2023.  There are reasons for us to be encouraged as well as cautious in these transitioning times. 

Rising interest rates result in lower bond values.  But remember that rising interest rates also mean bond funds will generally be yielding increased income as those interest rates rise.  We need to keep in mind that this is a balancing act involving bond values and the income they provide us.  We want diversified bond holdings in our portfolios to bring stability, particularly in volatile times, and to bring us some consistent income.  We don’t like seeing bond values go down on our statements, but the longer- term rising interest rates should bring us increased income in our bond funds.  And keep in mind that rising long-term interest rates are often a sign of the early phases of a business cycle.