Financial Planning

Changing Interest Rates/Inflation: Should You Adjust Your Portfolio?

May 27, 2025

Jennifer Lippin
Vice President and Senior Wealth Advisor
Washington Trust Wealth Management

 

Inflation and interest rates are two of the most influential forces shaping your portfolio performance. Understanding how these forces interact—and how to respond—can significantly impact your wealth over time. Particularly during this period of uncertainty and volatility, now is a good time to sit down with your portfolio manager to discuss how to take advantage of the current economic climate. 

The Core Relationship: Inflation and Interest Rates 

Inflation, simply defined as the general increase in prices over time, eats into your purchasing power and reduces the ‘real’ return on your investments. It is important that your investments outpace the rising cost of living.

Interest rates, simply defined as the cost for borrowing money, are highly influenced by Central Bank policies, which serve as a key tool for managing inflation. 

  • When inflation runs hot and the U.S. economy is strong, the Fed typically hikes rates to slow down the economy. This often results in decreased spending on both a personal and corporate consumer level, aimed at reducing prices for both parties over time.
  • When inflation cools, and when facing the potential for either stagflation (stagnant growth coupled with inflation) or even recession (longer-term negative economic growth), the Fed typically lowers rates to spur growth. 

How They Affect the Market

These inflation/interest rate shifts affect everything from cash and bond yields to stock valuations. Bond prices are inversely related to interest rates. When interest rates go up, bond prices go down, and vice versa.i Throughout history, stocks have been one of the most favorable ways to outpace the impact of inflation over time. In a rising inflation environment, investing in stocks may offer a hedge against inflation pressure, as corporate revenues and profits, in theory, should grow along with inflation (with a possible adjustment period).  

When Inflation and Interest Rates Rise

What it means for you:

  • Cash yields improve. Money Market funds, Certificates of Deposit (CDs), and short-term Treasuries become more attractive.
  • Borrowing gets more expensive. If you're looking to take out a mortgage or a car loan, you’ll be paying higher interest.
  • Bond prices fall. As new bonds offer higher yields, the market value of existing lower-rate bonds drops.
  • Equity valuations compress. Higher rates reduce the present value of future earnings, which can weigh on growth stocks, in particular.

Smart moves to consider:

  • Consider Treasury bills in addition to cash balances. These can offer solid, lower risk returns when rates are high.
  • Lock in fixed-rate loans early. If you anticipate needing a mortgage or car loan, try to act before rates rise further.
  • Be cautious with bonds. Focus on shorter duration, higher credit quality bonds.
  • Tilt toward value-biased stocks. Companies with strong cash flows and dividends tend to outperform in rising-rate environments.

When Inflation and Interest Rates Fall

What it means for you:

  • Lower yields on cash and savings. Money parked in savings accounts, CDs or money markets earns less.
  • Loans become cheaper. Mortgage rates drop and car loans improve.
  • Bond prices rise. Falling rates boost the value of all bonds — especially long-duration holdings.
  • Stock markets may rally as risk appetite grows. Lower rates often boost investor optimism and company profits, benefiting growth-oriented stocks.

Smart moves to consider:

  • Don’t hoard too much cash. Cash loses purchasing power faster when interest rates are low and inflation persists.
  • Refinance your loans. Lower rates mean potential savings on your mortgage, student loans, or other debt.
  • Consider extending fixed income duration and adding more credit risk.
  • Increase equity exposure. Growth-oriented sectors (tech, consumer discretionary) tend to thrive.

Tax-Aware Opportunities

  • Harvest tax losses during volatility. Market swings create opportunities to realize losses and rebalance risk.
  • Consider Roth conversions in market dips. When valuations fall, converting pre-tax assets to Roth IRAs can be more tax efficient.
  • Review municipal bonds. Yields from municipal bonds may offer attractive tax-adjusted returns, especially for high earners.

A Word on Timing and Strategy

As always, it’s important to diversify. Balance your stocks, bonds and cash according to your risk appetite. And think long term. Don’t overreact to short-term market swings. Rising and falling rates are part of economic cycles.

 

Washington Trust Wealth Management Can Help

Inflation and interest rates will ebb and flow throughout your investing lifetime. Turn to your Washington Trust Wealth Management team to work with you to adjust your asset allocation, rebalancing periodically, and seize timely opportunities to protect and grow your wealth while staying true to your long-term strategy.

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This document is intended as a broad overview of some of the services provided to certain types of Washington Trust Wealth Management clients. This material is presented solely for informational purposes, and nothing herein constitutes investment, legal, accounting, actuarial or tax advice. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. Please consult with a financial counselor, an attorney or tax professional regarding your specific financial, legal or tax situation. No recommendation or advice is being given in this presentation as to whether any investment or fund is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors, or markets identified and described were, or will be, profitable.

Any views or opinions expressed are those of Washington Trust Wealth Management and are subject to change based on product changes, market, and other conditions. All information is current as of the date of this material and is subject to change without notice. This document, and the information contained herein, is not, and does not constitute, a public or retail offer to buy, sell, or hold a security or a public or retail solicitation of an offer to buy, sell, or hold, any fund, units or shares of any fund, security or other instrument, or to participate in any investment strategy, or an offer to render any wealth management services. Past Performance is No Guarantee of Future Results.

It is important to remember that investing entails risk. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions. Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, and regulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. The value of a portfolio will fluctuate based on market conditions and the value of the underlying securities. Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment loss. Investors should contact a tax advisor regarding the suitability of tax-exempt investments in their portfolio.