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How Rising Interest Rates Impact the Economy and Your Portfolio



This infographic is available as a poster.

Infographic showing the historical federal funds target rate, projections for the target rate, and why high inflation has led to an interest rate increase. The graphic also shows how rising interest rates affect various investments using annualized returns during the last two rate hike periods.

Line chart showing how inflation has been above the Federal Reserve target in recent months. Rising interest rates can help combat high inflation.

This infographic is available as a poster.

How Rising Interest Rates Impact the Economy and Your Portfolio

The U.S. Federal Reserve has raised rates for the first time in more than three years. From a rock bottom rate set at the onset of COVID-19, the target rate now sits at 0.25-0.50%. This target range is set by the U.S. Federal Reserve to influence the rate U.S. banks use when lending funds to each other overnight.

On top of the recent increase, the Federal Reserve is predicting that the rate will rise substantially over the next few years. For instance, the midpoint of the target range could be as high as 3.6% by 2023. This infographic from New York Life Investments explores how rising interest rates impact the economy and your portfolio.

Interest Rates and the Economy

Why has the target interest rate risen? It’s all related to the goals of America’s central bank.

The Federal Reserve has a twofold mandate: reach maximum employment and maximize price stability. The inflation rate is key to achieving this mandate.

  • If inflation is too low, people may put off spending because they expect prices to fall, consequently weakening the economy.
  • If inflation is too high or volatile, it’s hard for people to plan out their spending and for businesses to set prices.
  • Moderate inflation can help people make informed decisions about saving, borrowing, and investing.

The Federal Reserve targets a 2% inflation rate, as measured by the Personal Consumption Expenditure (PCE) Index, over the long term.

Inflation Is Spiking

In recent months, U.S. inflation has far exceeded the Federal Reserve’s target. For instance, the 12-month PCE rate was 6.1% in January 2022.

In order to bring inflation closer to the 2% target over the long run, the Federal Reserve has raised interest rates. This has historically caused a domino effect that leads to lower inflation.

  1. Federal funds target rate rises
  2. Banks charge households and businesses higher rates on loans
  3. Households and businesses cut back spending and increase savings
  4. Demand for goods and services falls
  5. Companies raise prices more slowly, or lower prices
  6. Inflation drops

Against this backdrop of rising interest rates, how can investors best position their portfolio?

Fixed Income Investments During Rising Interest Rates

The potential for losses with a change in interest rates—known as interest rate risk—affects fixed-income investments most directly.

For example, let’s pretend you bought a zero-coupon bond with a 1-year maturity.

Purchase price$1,000
Interest rate10%
Payment at maturity$1,100
Bond value$1,000

The day after you purchase this bond, the Federal Reserve raises interest rates. Similar bonds in the market now offer $1,110 in one year, equivalent to an 11% interest rate.

A typical investor would not purchase your bond for $1,000 yielding 10% when they can purchase a new bond for the same price that yields 11%. Your bond’s value must drop so that it also offers an 11% return.

Purchase price$1,000
Interest rate11%
Payment at maturity$1,100
Bond value$991

Note: bond value calculated as $1,100 / 1.11 = $991.

The bond has decreased in value by $9 or 0.9%. In this way, rising interest rates can negatively impact the price of existing bonds.

Historical Returns When Rates Rise

Of course, bonds are not the only investments affected by rising interest rates. The table below highlights annualized returns of various asset classes during the last two rate hike periods. They are grouped within the broader categories of fixed income, stocks, and alternative investments.

Asset ClassJun. 2004–
Jul. 2006
Dec. 2015–
Jan. 2019
Bank Loans5.9%5.2%5.5%
Short-Term Bonds2.9%1.1%2.0%
Long-Term Bonds5.6%2.7%4.1%
High-Yield Bonds8.4%7.5%7.9%
Municipal Bonds4.9%2.7%3.8%
Large-Cap Stocks8.1%10.9%9.5%
Large-Cap Value Stocks12.6%9.1%10.8%
Large-Cap Growth Stocks3.8%12.3%8.1%
Ex-U.S. Developed Country Stocks21.5%5.5%13.5%
Global Commodities14.3%0.3%7.3%

Time periods measured from the first Federal Reserve rate hike until one month after the last rate hike, which, on average, is when the effective federal funds rate has tended to stabilize. See graphic for specific indexes used.

In light of this historical performance, there are a few things investors can consider.

Fixed Income
Long-term bonds outperformed short-term bonds during the last two rate hike periods, but had a higher level of risk. Taking risk into consideration, investors may want to diversify their portfolios with a variety of bond durations and maturity lengths.

Growth stocks have outperformed value stocks over the last decade, but this trend doesn’t always hold true during periods of rising interest rates. Investing in U.S. large cap equities overall, which includes both growth and value stocks, has historically had the least risk.

Global commodities had the highest average return, but also had the highest risk. Investors may consider holding a portion of their portfolio in commodities if they have a high risk tolerance.

Weathering Rising Interest Rates

Interest rate hikes have occurred throughout history when the Federal Reserve is aiming to combat inflation.

Diversifying across asset classes, styles, and bond term lengths may increase return potential while helping to manage risk.

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Visual Guide: The Three Types of Economic Indicators

From GDP to interest rates, this infographic shows key economic indicators for navigating the massive U.S. economy.



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A Visual Guide to Economic Indicators

Economic indicators provide insight on the state of financial markets.

Each type of indicator offers data and economic measurements, helping us better understand their relationship to the business cycle. As investors navigate the market environment, it’s important to differentiate between the three main types of indicators:

  • Leading
  • Coincident
  • Lagging

The above infographic from New York Life Investments shows a road map of indicators and what they can tell us about the economy.

What’s Ahead: Leading Indicators

Leading indicators present economic data that point to the future direction of the economy like a sign up ahead. Here are three examples.

1. Consumer Confidence Index

This key measure indicates consumer spending and saving plans. When the index is above 100, consumers may spend more over the next year. In December, the index jumped to 108 up from 101 in November. This was in part due to lower inflation expectations and improving job prospects.

In the December survey, 48% indicated that the job market remained strong, highlighting the strength of employment opportunities and likely influencing sentiment towards spending in the future.

2. ISM Purchasing Managers Index

The ISM Purchasing Managers Index indicates expectations of new orders, costs, employment, and U.S. economic activity in the manufacturing sector. The following table shows how the index is broken down based on select measures:

IndexNov 2022
Oct 2022Percentage
Point Change
Trend (Months)
Manufacturing PMI49.050.2-1.2Contracting1
New Orders47.249.2-2.0Contracting3
Manufacturing SectorContracting1

For instance, in November the index fell into its first month of contraction since May 2020. Falling new orders signal that demand has weakened while contracting employment figures indicate lower output across the sector.

3. S&P 500 Index

The S&P 500 Index indicates the economy’s direction since forward-looking performance is factored into prices. In this way, the S&P 500 Index can represent investor confidence as the index often serves as a proxy for U.S. equity markets. In 2022, returns for the index are roughly -20% year-to-date.

Current Conditions: Coincident Indicators

Coincident indicators reflect the current state of the economy, showing whether it is in a state of growth or contraction.

1. GDP

GDP indicates overall economic performance. Typically it serves as the most comprehensive gauge of the economy since it tracks output across all sectors. In the third quarter of 2022, real U.S. GDP increased 2.9% on an annual basis. That compares to 2.7% for the same period in 2021.

2. Personal Income

Rising incomes indicate a healthier economy and falling incomes signal slower growth. Personal income grew at record levels in 2021 to 7.4% annually amid a rapid economic expansion.

This year, U.S. personal income has grown at a slower pace, at 2.7% on an annual basis as of the third quarter.

3. Industrial Production Index

Strongly correlated to GDP, the industrial production index indicates manufacturing, utilities, and mining output. Below, we show trends in industrial production and how they correspond with GDP and personal income indicators.

DateU.S. GDPPersonal

*As of Q3 2022.

As the above table shows, factory production collapsed following the 2008 financial crisis, a key indicator for the depth of an economic downturn. Meanwhile, personal income sank over -3% while GDP fell -2%.

Despite economic uncertainty in 2022, industrial production remains positive, at a 4.7% growth rate, albeit somewhat slower than 2021 levels.

Rearview Mirror: Lagging Indicators

Like checking your back mirror, lagging indicators take place after a key economic event, often confirming what has taken place in the economy. Here are three key examples.

1. Interest Rates

Often, interest rates respond to changes in inflation. When rates rise it can slow economic growth and discourage borrowing. Rising interest rates typically signal a strong economy and are used to tame inflation. On the other hand, low interest rates promote economic growth.

Following years of record-low interest rates, the Federal Funds rate increased at the fastest rate in decades over 2022, jumping from 0.25% in March to 4.25% in December as inflation accelerated.

2. Consumer Price Index

This inflation measure can indicate cash flow for households. Inflation is often the result of rising input costs and increasing money supply across the economy.

Sometimes, inflation can reach a peak after an expansion has ended as rising demand in an economy has pushed up prices. In November, U.S. inflation reached 7.1% annually amid supply chain disruptions and price pressures across food prices, medical prices, and housing costs.

YearInflation Rate Annual Change

*As of November 2022.

3. Unemployment Rate

The unemployment rate has many spillover effects, impacting consumer spending and in turn retail sales and GDP. Historically, unemployment falls slowly after an economic recovery which is why it’s considered a lagging indicator. When the unemployment rate rises it confirms lagging economic performance.

Overall, 2022 has been characterized by a strong job market, with unemployment levels below historical averages, at 3.7% as of October.

On the Road

To get a more comprehensive picture of the economy, combining a number of indicators is more effective than isolating a few variables. With these tools, investors can gain more perspective on the cyclical nature of the business cycle while keeping a long-term perspective in mind on the road ahead.

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Europe’s Energy Crisis and the Global Economy

Europe’s energy crisis could last well into 2023. Here’s how the energy shock is causing ripple effects across the broader economy.



This infographic is available as a poster.

Europe’s Energy Crisis and the Global Economy

Volatile energy prices are squeezing household costs and business productivity in Europe.

While energy prices have fallen in recent months, several factors could influence price volatility looking ahead:

  • Russia slashing energy supplies
  • Rising winter heating demand
  • Shrinking European storage facilities

In the above infographic from New York Life Investments, we show the potential impacts of Europe’s energy crisis on consumers, businesses, and the wider global economy.

1. Impact on Consumers

Energy plays a central role in overall inflation. Here’s how it factors into the consumption baskets of various countries:

CountryEnergy %
of Inflation
Total Inflation Rate
(Sep 2022)
EnergyFoodAll Items Less Food
and Energy
United Kingdom28%8.8%2.5%1.3%5.0%

Source: OECD (Oct 2022). Annual inflation is measured by the Consumer Price Index.

As the above table shows, energy makes up nearly half of consumer price inflation in Germany. In the U.S., it contributes to about one-fifth of overall inflation.

Amid energy supply disruptions, U.S. winter heating costs are projected to rise to the highest level in a decade. As heating costs rise, it could impact consumer spending on discretionary items across the economy, along with other essential household bills.

2. Impact on Business

Natural gas and petroleum are key components in many industries’ energy consumption. As a result, the recent rise in energy prices is adding significant cost pressures to operations.

Below, we show how four primary sectors use energy, by source:

U.S. SectorPetroleumNatural GasRenewablesCoalElectricity

Source: EIA (Apr 2022). Figures represent end-use sector energy consumption in 2021.

In Europe, soaring energy prices have led to production declines in energy-sensitive industries over recent months. As a ripple effect, European fertilizer production capacity has decreased as much as 70%, crude steel capacity has fallen 10%, and aluminum and zinc production capacity has sunk 50%.

In response, some companies may move production out of Europe to regions with lower energy prices. This occurred in 2010-2014 amid high European energy prices, where companies relocated to the U.S., the Middle East, and North Africa.

3. Impact on the Economy

While the energy crisis is having devastating effects on many countries, some markets like the U.S. are more sheltered from the impact. As seen in the table below, the U.S. produces virtually all of its natural gas. Figures are shown in trillion cubic feet.

YearU.S. Natural Gas
U.S. Natural Gas
Net Imports

Source: EIA (Sep 2022).

By contrast, Europe imports 80% of its natural gas, primarily from Russia, North Africa, and Norway. Not only that, natural gas imports have increased over the last decade, up from 65% of total supplies in 2010.

Meanwhile, the energy sector is seeing strong returns supported by higher oil and natural gas prices, along with key fuel shortages as Russia constricts supplies to Europe. In November the S&P 500 Energy Index was up 65% year-to-date compared to the broader index, with -17% returns.

Europe’s Energy Crisis: Looking Ahead

Given the complex geopolitical environment, Europe’s energy crisis could last well into 2023, driven by many factors:

  • Rising demand from China post-COVID-19 lockdowns
  • Lower European fuel reserves
  • Inadequate energy infrastructure in the medium-term

The good news is that European government relief has reached €674 billion ($690 billion) to cushion the effect on households and businesses.

However, this has additional challenges as increasing money supply may be an inflationary force.

Amid market volatility, investors can avoid getting caught up in short-term market movements and stay focused on their long-term strategic allocation.

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