Americans should stay calm, bolster their personal savings, and keep an eye on their long-term financial plan as the Federal Reserve drastically hikes interest rates, personal finance experts told The Post.
The Fed raised its benchmark interest rate by 0.75% on Wednesday for the third consecutive month. By raising interest rates, the Fed is making it more expensive to borrow money, a policy move that reduces inflation by cooling spending.
Fed interest rate hikes reverberate across the US economy, impacting credit card interest rates, auto loans, savings accounts, and hindering the purchasing power of ordinary Americans.
They also have an indirect effect on mortgage rates, which have risen by more than 3% year-to-date to over 6% for a long-term contract.
Despite the tough conditions, families can make some common sense moves to maintain a solid short- and long-term budget, personal finance experts said.
“Don’t panic,” said Jacob Channel, a 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, you’re more likely to make risky decisions like panicking all of your stock or plunging into a bad real estate deal.
To begin, Americans should focus on “paying off high-cost debt and increasing emergency savings,” according to Greg McBride, Bankrate’s chief financial analyst.
“As many have learned during the pandemic, nothing helps get through an income cutoff like having money hidden for a rainy day,” McBride said. “Now is the time to increase emergency savings to put you on a firmer footing for whatever the economy can expect.”
Budget-conscious Americans should focus on “protection strategies” for their finances in the current economic environment, according to Kelly LaVigne, vice president of consumer information at Allianz Life. This includes reducing unnecessary purchases, even if the items are discounted by retailers who are desperate to empty inventory.
“If we can avoid it, especially if you are buying on credit, you will be charged more interest than you actually saved on the purchase,” LaVigne said. “You have to be careful not to spend too much on items you absolutely don’t need.”
The higher financial burdens add to the pain for Americans during a time of high inflation. Prices reached 8.3% warmer-than-expected in August, with food and accommodation costs standing at the highest level in decades, even as gas prices fell from all-time highs.
Fed Chairman Jerome Powell personally acknowledged that the central bank will keep a rate hike until inflation drops significantly, even if it means “some pain” for American households.
In addition to increasing their cash as much as possible, consumers should seek “safe havens” for their money in the form of federally insured savings accounts and government-guaranteed bonds.
Two-year Treasury bond yields exceeded 4% prior to the Fed’s announcement.
“Government-guaranteed bonds are always a good option in a period of time when the economy is a little shaky and perhaps a recession is on the horizon, just because they provide such a safe return on investment over a certain period of time. time, “said Canale.
Precious metals like 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. Potential buyers face the double crisis of higher mortgage rates and still high listing prices, while prospective sellers face falling demand and the need to secure their new mortgage when rates peak at 14. years.
The housing market in general is in better shape since the Great Recession, with far fewer homeowners owning “underwater” mortgages with balances that exceed their home values. However, buying activity is likely to remain weak as the Fed raises rates.
“This is not a great time to buy a home due to high house prices, high mortgage rates and still fairly limited inventory to choose from,” McBride said. “I think the environment for home buyers will improve, but it will probably take a weaker economy to do that.”
Although cash savings are an important part of the preparations, experts stressed that Americans shouldn’t lose sight of their long-term savings plans just because the market is in trouble.
Consumers should avoid the temptation to tap into retirement savings and continue to pay their regular contributions to 401 (k) and IRA plans.
“Don’t pull out Social Security just because it’s there and it could help you with these short-term difficulties,” LaVigne said. “If you absolutely need the money, if you are 62 or older, surely you will have to apply for that 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 selling their stock holdings as the market collapses and even seek out buying opportunities with basic business names that have gone cheap.
“It is the discipline of continuing to contribute and resisting hardship that rewards patient and disciplined investors over time,” said McBride.
“Don’t save your investments,” he added. “Don’t give in to the instinctive reaction of selling in the face of volatile markets thinking you will come back later at a better time.”