What if Interest Rates Stay Higher for Longer?

Interest rates are once again commanding attention. Consumers, investors, homeowners, and prospective buyers are watching the Federal Reserve closely, wondering when—or whether—meaningfully lower rates will arrive.

It’s an understandable question. Interest rates influence everything from mortgages and business loans to savings accounts and bond yields. When borrowing costs are elevated, waiting for cheaper money can seem like the prudent choice.

But there may be a more useful question to ask:

What if interest rates stay higher for longer?

More importantly, does your financial strategy still work if they do?

Your Financial Plan Shouldn't Depend on Predicting the Fed

Interest-rate forecasts change frequently because the economic information behind them changes, too. Inflation, employment, economic growth, consumer spending, and other factors can all influence monetary policy.

That makes building a financial strategy around the timing of future rate cuts difficult.

Rather than trying to predict exactly when rates will move, consider whether your financial plan works under multiple scenarios. What happens if rates decline quickly? What if they fall gradually? And what if borrowing costs remain elevated longer than expected?

A resilient financial plan should not require one particular economic forecast to be correct.

Higher Rates Can Be Good News for Savers

One clear beneficiary of higher interest rates has been cash.

High-yield savings accounts, money-market funds, CDs, and other cash alternatives have offered yields that would have been difficult to find during the ultra-low-rate environment of years past.

That can make holding additional cash tempting. But the interest rate you're earning shouldn't determine how large your emergency fund needs to be.

Emergency savings have a specific job: providing readily accessible money for unexpected expenses, temporary income disruptions, or known near-term needs. The appropriate amount depends on factors such as household expenses, job stability, insurance coverage, upcoming purchases, and other financial obligations.

An attractive yield doesn't necessarily change that calculation.

Once sufficient reserves have been established, the question becomes whether additional cash is serving a purpose—or whether money intended for longer-term goals could be better positioned elsewhere.

Borrowing Requires a Different Calculation

The other side of higher interest rates is considerably less enjoyable: borrowing becomes more expensive.

Mortgage rates can affect the affordability of a home. Variable-rate loans and lines of credit may require larger payments. Financing a business, renovation, vehicle, or investment property can also look considerably different when the cost of capital increases.

For some people, postponing a large purchase may make sense.

For others, continually waiting for rates to fall can create a different kind of opportunity cost.

Instead of asking only, "When will rates come down?", consider asking:

"Does this decision make financial sense at today's rate?"

If it does, lower rates in the future may eventually create refinancing opportunities. If it doesn't, the decision may need to change regardless of what the Federal Reserve does next.

Don't Forget About the Opportunities Higher Rates Can Create

Higher interest rates aren't universally negative.

One area worth revisiting is fixed income.

For years, extremely low yields made it difficult for bonds to provide meaningful income. A higher-rate environment can create opportunities across Treasuries, investment-grade bonds, municipal bonds, CDs, and other income-oriented investments.

That doesn't mean investors should simply purchase whichever bond or CD offers the highest advertised yield. Maturity, credit quality, taxes, liquidity, interest-rate sensitivity, and the purpose of the investment all matter.

But it does mean investors may have more choices when building the defensive and income-producing portions of a portfolio.

Retirees looking for income may see one set of opportunities, while younger investors accumulating wealth may approach the same environment differently.

Are You Waiting for Interest Rates to Make a Decision for You?

This may ultimately be the most important question.

Perhaps you've been waiting for mortgage rates to decline before purchasing a home. Maybe excess cash remains on the sidelines because you're unsure where markets or rates are headed. Perhaps you're delaying a portfolio change, business investment, debt strategy, or another major financial decision.

Sometimes waiting is the right strategy.

But waiting indefinitely for the "perfect" interest rate requires making a prediction about something outside of your control.

Financial planning is less about knowing exactly what the Federal Reserve will do next and more about creating a strategy capable of adapting when conditions change.

Higher rates create winners and losers. They can reward savers while increasing costs for borrowers. They can make certain purchases more difficult while creating opportunities for investors seeking income.

The important question isn't simply whether rates will rise or fall next.

It's whether your financial strategy works either way.

If you've been postponing an important financial decision because you're waiting for interest rates to change, it may be a good time to revisit the numbers and determine whether your strategy still aligns with your goals.

Elswick Investments provides comprehensive financial planning and private wealth management designed around each client's individual priorities, circumstances, and long-term objectives.

How Much Cash Is Too Much?

Cash has become a surprisingly important part of financial planning conversations over the last several years. Following the Great Recession and suddenness of the pandemic, persistent inflation prompted the Federal Reserve to raise interest rates aggressively, and savers suddenly found themselves earning yields on cash that had been difficult to find for years. Money market funds, high-yield savings accounts, CDs and other cash equivalents became increasingly attractive places to keep money.

But market conditions change—and financial plans should evolve with them.

As interest rates move lower, the return available on cash may decline as well. At the same time, inflation can continue to erode purchasing power. For investors who accumulated significant cash balances while yields were higher, this creates an important question: How much cash should you actually keep, and when does holding too much cash become a risk of its own?

Cash Is an Important Part of a Financial Plan

Holding cash isn't inherently good or bad. What matters is the purpose that money serves.

An emergency fund is one of the most obvious reasons to maintain cash reserves. Unexpected home repairs, medical expenses, employment changes and other surprises can happen at any time. Money earmarked for expenses in the relatively near future may also belong somewhere accessible rather than being exposed to unnecessary market volatility.

For retirees, cash can serve another important role. Having funds available for upcoming spending needs may reduce the need to sell investments at an inconvenient time during a market downturn. For professionals in their peak earning years, cash can provide flexibility for upcoming purchases, career transitions, real estate decisions or other major financial goals.

Liquidity has value. The goal isn't to eliminate cash from a portfolio. It's to determine how much liquidity is appropriate for your particular circumstances.

The Hidden Cost of Holding Too Much Cash

The challenge begins when cash accumulates without a specific purpose.

For several years, higher interest rates made it easier to overlook this issue because savers could earn relatively attractive yields without accepting much investment risk. As rates decline, however, cash yields can decline with them.

Inflation adds another consideration.

Imagine your cash savings are earning 2.5% annually while inflation is running at 3.4%. Even though your account balance is earning interest, the purchasing power of that money is effectively declining by approximately 0.9% before considering other factors such as taxes.

Over one year, that difference may not feel particularly significant. Over longer periods and larger balances, however, the cumulative impact can become much more meaningful.

This is one reason investors should distinguish between money that needs to remain liquid and money that is simply sitting in cash.

Cash Can Feel Safe While Still Carrying Risk

When people think about investment risk, they often think first about stock market volatility. Cash generally doesn't experience those daily price swings, which can make it feel substantially safer.

But volatility isn't the only financial risk.

There is also purchasing-power risk: the possibility that inflation causes your money to buy less in the future. There is opportunity cost: money held in cash for long periods may miss opportunities for growth elsewhere. And there is longevity risk, particularly for retirees who may need their assets to support decades of future spending.

The appropriate balance depends on what the money is intended to accomplish.

Cash needed next year and money intended to fund a goal 15 years from now generally shouldn't be treated the same way. A financial plan can help assign different jobs to different portions of your assets rather than expecting one type of account or investment to accomplish everything.

What Can You Do With Excess Cash?

Investing excess cash doesn't necessarily mean moving it all into stocks.

Depending on an investor's objectives, risk tolerance, tax situation and timeline, there may be a range of possibilities to consider. Bonds and other fixed-income investments may play a role for some investors. A diversified investment portfolio may make sense for money with a longer time horizon. Taxable brokerage accounts can also provide access to investments without the age-related withdrawal rules commonly associated with retirement accounts.

That last point is particularly important. There is sometimes a misconception that investing means putting additional money into a 401(k) or IRA and accepting restrictions on when it can be accessed. Retirement accounts are valuable planning tools, but they aren't the only way to invest.

For professionals in their highest earning years, taxable investments can potentially complement retirement savings while creating greater flexibility for goals before retirement. For recently retired investors, coordinating cash, fixed income and longer-term investments can help create a strategy designed around both current spending and future needs.

How Much Cash Should You Keep?

There isn't one cash target that works for everyone.

Rules of thumb about keeping several months of expenses in an emergency fund can provide a starting point, but financial planning becomes more nuanced as wealth and financial responsibilities increase. Someone approaching retirement may have very different liquidity needs from a professional with stable income and decades until retirement.

Rather than focusing exclusively on a specific dollar amount, consider what your cash is intended to fund. How much is your emergency reserve? Are there major purchases or expenses expected over the next few years? How stable is your income? If you're retired, where will upcoming distributions come from? And once those needs are accounted for, how much cash remains without a defined purpose?

That final amount is often where a deeper conversation becomes worthwhile.

Give Every Dollar a Purpose

Cash serves an important role in nearly every financial plan. The objective isn't to chase the highest possible return on every dollar or invest money that needs to remain readily available.

Instead, the goal is intentionality.

As interest rates and inflation change, a cash strategy that made sense a few years ago may no longer be the best fit today. Periodically reviewing your savings, investment accounts and upcoming financial needs can help determine whether your money is positioned appropriately for both the life you're living now and the goals you're working toward.

If you've accumulated a larger cash balance, are approaching retirement, recently retired, or simply haven't reviewed how much you're holding in savings, this may be a good time to revisit the conversation. A comprehensive financial plan can help determine how much cash you truly need, where that cash should be held, and whether excess savings could be put to work more effectively elsewhere.