Americans should stay calm, bolster their personal savings and keep an eye on their long-term financial plan as the Federal Reserve raises interest rates sharply, personal finance experts told the Post.
The Fed raised its key rate by 0.75% on Wednesday for the third consecutive month. By raising interest rates, the Fed makes it more expensive to borrow money — a policy move that lowers inflation by cooling spending.
The Fed’s interest rate hikes ripple through the US economy, affecting credit card interest rates, auto loans, savings accounts, and hampering the purchasing power of ordinary Americans.
They also have an indirect effect on mortgage rates, which have increased from more than 3% since the start of the year to more than 6% for a long-term contract.
Despite the tough conditions, households can take common sense steps to maintain a solid budget in the short and long term, personal finance experts said.
“Don’t panic,” said Jacob Channel, senior economist at LendingTree. “What you absolutely shouldn’t do in a time like this is panic and think the sky is falling. If you do this, you’re more likely to make risky decisions like selling all your stocks in a panic or rushing into a bad real estate deal.
To start, Americans should focus on “paying down high-cost debt and increasing emergency savings,” according to Greg McBride, chief financial analyst at Bankrate.
“As many have learned during the pandemic, nothing helps weather a period of income disruption like having cash stashed away for a rainy day,” McBride said. “Now is the time to increase that emergency savings to put yourself on a stronger footing for whatever may happen to the economy.”
Budget-conscious Americans should focus on “protective strategies” for their finances in the current economic environment, according to Kelly LaVigne, vice president of consumer insights at Allianz Life. This includes reducing unnecessary purchases, even as items are discounted by retailers desperate to empty their inventory.
“If we can avoid that, especially if you’re buying on credit, you’ll have to pay more interest than what you actually saved on the purchase,” LaVigne said. “You have to be careful not to overspend on items you absolutely don’t need.”
Higher borrowing costs add to Americans’ pain during a time of high inflation. Prices hit a higher-than-expected 8.3% in August, with food and shelter costs at their highest levels in decades, even as gasoline prices fell from to record highs.
Fed Chairman Jerome Powell has personally acknowledged that the central bank will continue to raise rates until inflation drops significantly, even if it means “some pain” for US households.
In addition to increasing their liquidity as much as possible, consumers should seek “safe havens” for their money in the form of federally insured savings accounts and government guaranteed bonds.
Yields on two-year Treasury bills topped 4% ahead of the Fed’s announcement.
“Government-backed bonds are always a good option in a time when the economy is a bit fragile and a downturn may be on the horizon, simply because they offer such a secure return on investment over a given period,” says Canal.
Precious metals such as silver and gold, traditionally seen as a hedge against economic volatility, are also “generally decent long-term investments”, according to Channel.
The housing market is a more troubling proposition. Would-be buyers face the twin crises of higher mortgage rates and still-high listing prices, while would-be sellers face falling demand and the need to secure their own new mortgage when rates are at its highest for 14 years.
The overall housing market is in better shape than it was during the Great Recession – with far fewer homeowners owning “underwater” mortgages with balances that exceed the value of their homes. Still, buying activity is expected to remain subdued as the Fed raises rates.
“Now is not a good time to buy a home due to high home prices, high mortgage rates and still quite limited inventory to choose from,” McBride said. “I think the environment for homebuyers will improve, but it will likely take a weaker economy to get there.”
While saving cash is an important part of preparations, experts stressed that Americans shouldn’t lose sight of their long-term savings plans just because the market is struggling.
Consumers should avoid the temptation to dip into their retirement savings and continue to make their normal contributions to 401(k) and IRA plans.
“Don’t take out Social Security just because it’s there and it might help you through those short-term challenges,” LaVigne said. “If you absolutely need the money, if you’re 62 or over, you’ll definitely have to claim this benefit, but we have to look long term for things like Social Security. You don’t want to change your plan just because of a short-term event.
Investors should also avoid sell-offs in their stocks as the market crashes — and even look for buying opportunities with commodity company names that have gone cheap.
“It’s the discipline to keep contributing and hanging on through tough times that rewards patient, disciplined investors over time,” McBride said.
“Don’t bail out on your investments,” he added. “Don’t succumb to the knee-jerk reaction to sell in volatile markets thinking you’ll come back later at a better time.”
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