Higher interest rates could finally be on their way. Last week, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, gave a speech outlining a plan for tightening and selling off some Federal Reserve assets.
If Plosser's straightforward plan comes to pass, the Philly Fed would gradually raise rates to 2.5%-3.5% over the next 12-18 months, while selling off assets and letting assets roll off the Fed's balance sheet.
At first glance, this scenario would benefit investors holding cash, and those who want to buy the bonds and mortgage-backed securities the Fed would be selling. Those who rely on short-term borrowing would end up on the losing side.
One possible group of winners? Large-cap tech. Companies such as Apple and Microsoft have billions of net cash on their balance sheets, and a couple of points on the rate they're earning would add a small tick to earnings.
For possible losers, look to mortgage REITs. Companies such as Annaly Capital (NYSE: NLY), Hatteras Financial (NYSE: HTS), and Chimera Investment (NYSE: CIM) borrow short-term and buy longer term mortgage securities. Rising short-term rates will squeeze the rate spreads and the juicy, double-digit dividend payouts investors have been enjoying. Federal Reserve security sales cut both ways for these companies. An increased supply of paper should put pressure on prices and offer buying opportunities. But that same price pressure would also cut the value of paper already on the books.
A speech by one Fed bank president doesn't mean anyone should rush to make changes to his or her portfolio, particularly since Plosser included this disclaimer in his speech: "As always, and perhaps particularly so today, the views I express are my own and do not necessarily represent those of the Federal Reserve System or my colleagues on the Federal Open Market Committee."
Plosser's plan is hardly radical, and it would still keep short-term rates near historic lows. Still, a public statement like this confirms that we're closing in on the end of easy money. Foolish investors should consider what tighter Fed policy would mean for their portfolios before our country's monetary policy actually changes.
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Fool contributor Russ Krull owns shares of Hatteras Financial, but does not have have a position in any of the other companies mentioned in this article. We can all bank on the Fool's disclosure policy.
