Fed Raises Rates as Bond Yields Climb, Raising Stakes for Stock Investors

The Federal Reserve raised its benchmark interest rate this week after bond yields climbed for weeks, according to The Motley Fool. The increase came even as the S&P 500 traded near record levels.

JPMorgan Chase CEO Jamie Dimon recently listed a set of risks facing markets: geopolitical tensions and wars, persistent inflation, large government deficits worldwide and elevated asset prices, according to the Motley Fool's report by Reuben Gregg Brewer.

Dimon called these forces tectonic plates that could collide and warned the collision could shake markets the way an earthquake would.

Bonds Now Compete Directly With Stocks

Rising bond yields have made fixed-income investments more attractive relative to equities, Brewer wrote. Bonds are generally viewed as safer than stocks. When their yields climb, some investors move money out of equities and into bonds.

That shift can drag down stock prices. Brewer illustrated the point by comparing a bond yielding 5% or more against an S&P 500 offering a yield of just 1%, arguing the gap gives cautious investors less reason to hold stocks trading near all-time highs.

Bonds do not offer the growth potential of a company's earnings, but they offer safety.

The Fed's Inflation Fight

Bond yields rose ahead of the Fed's rate increase as investors weighed sticky inflation, the Motley Fool reported. Inflation raises costs for companies and squeezes profit margins.

Raising rates can cool inflation, but it can also tip the economy into recession. Bear markets, periods of sharp, sustained stock declines, often accompany recessions, and few sectors escape them, according to Brewer's analysis.

Yahoo Finance, which syndicated the same Motley Fool report, noted that today's inflation is tied in part to geopolitical conflicts outside the Fed's direct control.

What It Means for Wallets and Portfolios

The pattern Brewer described cuts two ways for household finances. Higher bond yields can mean better returns for savers willing to lock up money in fixed income.

At the same time, a Fed fighting inflation with higher rates raises borrowing costs on everything from mortgages to credit cards, and a resulting recession would hit both stock portfolios and paychecks.