It is the fifth out of six US central bank increases months and its third consecutive increase of 75 basis points, which it will put upward pressure on other interest rates across the economy.
For consumers, the Fed’s move will once again spur the question of where to park their savings for the best return and how to minimize funding costs.
“Credit card rates are the highest since 1995, mortgage rates are the highest since 2008, and car loan rates are the highest since 2012. With further rate hikes still to come, it will be an extra effort to household budgets with variable rate debt such as lines of credit and credit cards for home equity, ”said Greg McBride, chief financial analyst at Bankrate.com. “On a positive note, savers are seeing high yield savings accounts and certificates of deposit at levels last seen in 2009.”
Here are some ways to position your money so that you can benefit from the rate hike and protect yourself from their disadvantage.
Credit Cards: Minimize the bite
As the overnight bank lending rate, also known as the federal funds rate, goes up, the various lending rates offered by banks to their customers tend to follow.
So you can expect to see an increase in your credit card rates within just a few statements.
Currently, the average credit card rate is 18.16%, up from 16.3% at the start of the year, according to Bankrate.com.
Best advice: If you’re carrying balances on your credit cards, which typically have high variable interest rates, consider transferring them to a zero-rate balance transfer card that locks in a zero-rate for a period of 12 to 21 months.
“This isolates you [future] rate hikes and gives you a clear track to pay off your debt once and for all, “McBride said.” Less debt and more savings will allow you to better cope with rising interest rates, and it’s especially valuable if the economy gets worse “.
Just make sure you find out what any fees you will have to pay (for example, a balance transfer fee or an annual fee) and what the penalties will be if you make a late payment or miss a payment during the zero rate period. The best strategy is always to pay off the existing balance as much as possible, and to do it on time every month, before the end of the zero rate period. If not, any remaining balance will be subject to a new interest rate which may be higher than what you had before if rates continue to rise.
If you are not transferring to a zero-rate balance card, another option might be to get a relatively low fixed-rate personal loan.
Home Loans: Freeze Fixed Rates Now
According to Freddie Mac, the 30-year fixed-rate mortgage averaged 6.29% in the week ending September 22, up from 6.02% the week before. This is more than Double what it was in mid-September last year (2.86%) and significantly higher than where it started this year (3.22%).
And mortgage rates can go up even more.
That said, “don’t jump into a big buy that’s not right for you just because interest rates might go up on. Rushing to purchase a high-value item like a house or car that doesn’t fit your budget is a recipe for trouble, no matter what interest rates do in the future, “said Lacy Rogers, financial planner. certified based in Texas.
If you already own a home with a variable rate home equity line of credit and have used part of it to do a home improvement project, McBride recommends asking your lender if it is possible to fix the rate on your remaining balance. effectively creating a fixed rate home loan. Suppose you have a $ 50,000 line of credit but only used $ 20,000 for a renovation. You would ask to have a flat rate applied to the $ 20,000.
If that’s not possible, consider paying off the balance by taking out a HELOC with another lender at a lower promotional rate, McBride suggested.
Bank savings: shop around
If you’ve been hiding cash at large banks that have paid next to nothing in interest on savings accounts and certificates of deposit, don’t expect things to change just because the Fed is raising rates, McBride said.
This is because big banks are swimming in deposits and don’t have to worry about attracting new customers.
Thanks to the ridiculous rates of big players, the average bank savings rate is now just 0.13%, up from 0.06% in January, according to Bankrate.com’s weekly institution survey on September 14. The average rate on a one-year CD is now 0.77% as of September 19, up from 0.14% at the start of the year.
But online banks and credit unions are trying to attract more deposits to fuel their burgeoning lending businesses, McBride said. As a result, they are offering much higher rates and have raised them as the benchmark rates rise.
So look around. Today some online savings accounts pay over 2%. And one-year high yield CDs offer up to 2.50%. If you want to make a switch, however, be sure to only choose online banks and credit unions that are federally insured.
Another high-yield savings option
But that rate will only be in effect for six months and only if you buy an I-Bond by the end of October, after which the rate should adjust. If inflation falls, the I-Bond rate will also fall.
There are some limitations. You can only invest $ 10,000 per year. You cannot redeem it in the first year. And if you collect between the second and fifth years, you will lose the previous three months of interest.
“In other words, I-Bonds are not a substitute for your savings account,” McBride said.
However, they preserve the purchasing power of your $ 10,000 if you don’t need to touch it for at least five years, and that’s nothing. They can also be of particular benefit to people planning to retire over the next 5-10 years as they will serve as a safe annual investment that they can leverage if needed in their early retirement years.
If inflation proves sticky despite higher interest rates, you might also consider investing some money in Treasury Inflation-Protected Securities (TIPS), said Yung-Yu Ma, chief investment strategist at BMO. Wealth Management.
Equities: Look for broad exposure and pricing power
The confusing mix of factors at play in today’s markets makes it difficult to say which sector, asset class or company will certainly do well in an environment of rising rates, Ma noted.
“It’s not just about rising rates and inflation, there are ongoing geopolitical concerns … And we have a slowdown that could lead to a recession or maybe not … It’s a rare, even rare, mix of multiple factors, “he said.
For example, financial services firms can perform well in an environment of rising rates because, among other things, they can earn more on loans. But if there is an economic slowdown, a bank’s overall loan volume could decrease.
In terms of real estate, Ma said, “significantly higher interest and mortgage rates are challenging … and that headwind could persist for a few more quarters or even longer.”
In the meantime, he added, “commodities have fallen in price, but are still a good hedge given the uncertainty in the energy markets.”
Remains bullish on value stocks, especially the small caps, which outperformed this year. “We expect outperformance to persist on a multi-year basis”, He said.
That said, if you are planning to invest in a specific stock, consider the pricing power of the company and how consistent the demand for their product is likely to be. For example, tech companies typically don’t benefit from the rate hike. But as cloud and software service providers issue subscription prices to customers, these could rise with inflation, said certified financial planner Doug Flynn, co-founder of Flynn Zito Capital Management.
Bonds: Go short
To the extent that you already own bonds, your bond prices will fall in a rising interest rate environment. But if you are in the market to buy bonds you can benefit from this trend, especially if you buy short-term bonds, ie one to three years. And why their prices have fallen more than long-term bonds and their yields have risen more. Short-term and long-term bonds typically move in tandem.
“There is a good opportunity in short-term bonds, which are severely displaced, “Flynn said. “For those in higher income tax bands there is a similar opportunity in tax-free municipal bonds.”
But he added that 2-year Treasuries, which are yielding nearly 4%, “are attractive here because we don’t expect the Fed to go much beyond that level with short-term interest rates.”
Muni prices have fallen significantly, yields have risen, and many states are in better financial shape than before the pandemic, Flynn noted.
Other assets that might do well are so-called floating rate instruments of companies that need to raise cash, Flynn said. The floating rate is tied to a short-term benchmark rate, such as the federal funds rate, so it will go up every time the Fed raises rates.
But if you’re not a bond expert, you’d better invest in a fund that specializes in making the most of a rising rate environment through floating rate instruments and other bond income strategies. Flynn recommends looking for a strategic income or flexible income mutual fund or ETF, which will contain a number of different types of bonds.
“I don’t see many of these choices in 401 (k) s,” he said. But you can always ask your 401 (k) provider to include the option in your employer’s plan.