The Federal Reserve
Part of the mission given to the Federal Reserve (the Fed) by Congress is to promote a to keep consumer prices stable–that is, to keep prices from moving too quickly in either direction. The Fed currently considers a rate of inflation of around 2 percent per year, as measured by a particular price index, called the price index for personal consumption expenditures, to be a healthy and sustainable target.
According to The Federal Reserve of Cleveland, “The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.”
Interest Rate Risk
In general, low interest rates can be good for mortgage and other consumer loans because you will pay less to borrow money. However, low interest rates are not so good when you’re looking at the low interest credited on savings accounts and CDs.
But the main reason interest rate risk is considered a risk has to do with bond prices.
Understanding Bonds
Bonds are basically fixed-rate loans with set maturity dates. Buying or selling them before maturity, when current interest rates might be higher or lower than the bond’s face value interest rate, is what affects their price.
In general, when interest rates go up, bond values go down. As bond prices increase, bond yields fall. Interest rate risk is common to all bonds, even U.S. Treasury bonds.
Investopedia notes, “The most important difference between the face value of a bond and its price is that the face value is fixed, while the price varies.”
Bonds In Retirement Portfolios
Pre-retirees and retirees with money invested in the stock market often have the majority of their investments held in bonds after they reach age 50+ because in general, bonds are often considered “safer” than stocks.
A common principle used by some stockbrokers and bankers called “the Rule of 100” uses age to determine how much of their client portfolios are held in bonds versus stocks. This rule suggests subtracting your age from 100 to estimate the percentage of your portfolio that could be invested in stocks. The remainder is often held in bonds or other fixed-income investments. For example:
- At age 60: 60% in bonds and 40% in stocks
- At age 70: 70% in bonds and 30% in stocks
Many 401(k) and retirement plans automatically shift toward more bonds as you approach retirement through “target date” funds.
Bond Versus Bond Funds
Because the term “bonds” is often used interchangeably with “bond funds,” it’s important to distinguish between the two:
- Individual Bonds: A direct loan a government, agency, or company with a set maturity date, locking in the face value unless the issuer defaults.
- Bond Funds: A mutual fund or exchange-traded fund (ETF) that invests in a collection of bonds. The fund manager buys and sells bonds in response to market conditions, meaning the fund’s value fluctuates daily.
Some Wall Street experts consider bond funds to be correlated with stock market risk, and therefore not “safer.” According to Investopedia, “Bond funds are traded on the market, and the market prices on bonds change daily, just like any other publicly traded security.” Because of this, bond funds can be more sensitive to market movements than individual bonds, and they don’t have a guaranteed maturity value.
Inflation risk, bond risk, and interest rate risk can be managed through strategies like portfolio diversification, insured solutions that offer inflation adjustments, and by proper financial and retirement planning.
It’s more important than ever to make sure you are protected from multiple risks as you get closer to or are already in retirement. If you have any questions about your situation, please don’t hesitate to call us. You can reach SoundPath Retirement Strategies at (425) 365-0204. We have four office locations in WA & OR, three in Washington and one in Oregon, to serve you. Or meet with us online!
Sources:
https://www.federalreserve.gov/monetarypolicy/2025-06-mpr-part2.htm
https://www.investopedia.com/terms/b/bondfund.asp
https://www.investopedia.com/terms/b/bond-yield.asp
https://www.fidelity.com/learning-center/investment-products/fixed-income-bonds/what-is-a-bond
https://www.investopedia.com/ask/answers/013015/how-does-face-value-differ-price-bond.asp
https://www.cnbc.com/select/what-happens-when-interest-rates-go-down/
