If the Fed Raises Interest Rates in October, History Says Investors Should Make This 1 Move

On Sept. 16, the Federal Reserve raised its benchmark rate by 25 basis points to 3.75%-4.00%. That marked the Fed's first rate hike in three years and prompted issuers of CDs, bonds, and other fixed-income investments to raise yields to stay competitive. Those higher yields also pulled investors away from stocks and other riskier investments.

The Fed will make its next interest rate decision after its Federal Open Market Committee (FOMC) meeting on Oct. 28. That decision will largely hinge on the next Consumer Price Index (CPI) report on Oct. 14. If the U.S. inflation rate remains far above the Fed's target rate of 2% -- as it did at the end of August (3.4%) -- another rate hike could be on the table. If that happens, you can shield your portfolio from the near-term volatility with one simple move.

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Replace some of your debt-driven stocks with fixed-income investments

Any company that runs on debt instead of excess cash will struggle as interest rates rise. That's bad news for companies like NextEra Energy (NYSE: NEE), the wind and solar giant that paid out $4.6 billion in interest (compared to its $6.8 billion in net income) in 2025 and ended its latest quarter with a debt-to-equity ratio of 2.4. Another company that could struggle is QuantumScape (NASDAQ: QS), the solid-state battery maker that hasn't commercialized a single product but is still valued at $2.9 billion.

Instead of letting rising rates weigh down those types of stocks, investors should rotate some of that cash into fixed-income investments like CDs and Treasuries. As of this writing, 2-year CDs are yielding 5.1%, 3-year CDs are yielding 5.3%, and 5-year CDs are paying 5.6%. The 2-year Treasury yields 4.8%, the 3-year Treasury yields 5%, and the 5-year Treasury yields 5.1%. Those stable returns could preserve your capital if rising rates trigger a market crash.

If you don't want to lock up your cash, you can invest in exchange-traded funds (ETFs) that hold baskets of Treasuries but still trade like stocks. A popular option is the iShares U.S. Treasury Bond ETF (NYSEMKT: GOVT), which holds a broad range of U.S. Treasuries across all maturities, pays a 30-day SEC yield of 5.01%, and charges a low expense ratio of 0.05%.

But you'll also be fine if you don't panic

It's a prudent move to shift some of your cash into fixed-income plays as interest rates rise, but you'll also be fine if you simply stick with an S&P 500 (SNPINDEX: ^GSPC) ETF and ride out the near-term volatility. After all, the S&P 500 has delivered an average total annual return of about 10% since its inception in 1957 -- and it can easily bounce back from the next downturn.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.