Brace yourself, the Fed is about to inflict ‘some pain’ in its fight against inflation – here’s how to prepare your wallet and wallet

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Weeks ago, Federal Reserve chairman Jerome Powell warned that there would be “some pain for households and businesses” as the central bank continued to raise interest rates to try to combat four decades of high inflation.

Wall Street expects another 75 basis point hike in Federal Funds interest rates, which would repeat the Fed’s earlier decisions in June and July.

The Fed will announce Wednesday afternoon how much it will raise its key interest rate. An increase will eventually affect credit card rates, auto loans, mortgages and of course investment portfolio balances.

If the Fed reveals another 75 basis point hike, it would bring the key rate to a range of 3% to 3.25%. Last year it was close to 0% at the same point.

Now the average annual rates on a new credit card are 18.10%, nearly 18.12% APR last seen in January 1996. Auto loans have hit 5% and mortgage rates hit 6% for the first time since 2008.

The moves have not been lost on Wall Street. The Dow Jones Industrial Average DJIA,
+0.34%
is down 15.5% year-to-date and the S&P 500 SPX,
+0.50%
is down more than 19%, dragged by multiple concerns, including an aggressive Fed.

“I think the Fed will have to hurt if they want to maintain their credibility, which we think they will do, and if they really want to get inflation under control.”


— Amit Sinha, director and head of multi-asset design at Voya Investment Management

According to a Nationwide survey released Tuesday, six in 10 people say they are moderately or extremely concerned about rising interest rates. More than two-thirds expect interest rates to rise much higher in the next six months.

Don’t take it personally. Fed is raising borrowing costs to reduce demand and cool inflation, said Amit Sinha, director and head of multi-asset design at Voya Investment Management, the wealth management arm of Voya Financial VOYA.
+0.43%.

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“I believe the Fed will have to hurt if they want to maintain their credibility, which we think they will do, and if they really want to get inflation under control,” Sinha noted.

But experts advise against committing to the Fed’s decision. Getting debt under control, thinking about the timing of large, price-sensitive purchases, and eye portfolio shifts can be ways to ease the financial pain ahead.

Pay off debts as soon as possible

According to the Federal Reserve Bank of New York, Americans had approximately $890 billion in credit card debt in the second quarter. Rising APRs are making it more expensive to carry a balance, and a new study suggests that more people are holding onto debt for longer – and likely paying more interest as a result.

Focus on getting rid of high-yield debt, experts say. Very few investment products have a good chance of future double-digit returns, so get rid of double-digit APRs on those credit card balances, they note.

It can be done even with inflation over 8%, said financial adviser Susan Greenhalgh, president of Mind Your Money, LLC in Hope, RI. Start by writing down all the debts, breaking down the principal and interest. Then group all income and expenses in a given time period, listing the expenses from largest to smallest, she said.

The “visual connection” is crucial, she said. People may have suspicions about how they spend money, Greenlagh said, but “until you see it in black and white, you don’t know.”

From there, people can see where they can reduce costs. When compromises get tough, Greenlagh turns it back to financial pain. “If the debt hurts more than cutting or adjusting some spending, then you cut back or adjust in favor of paying off the debt,” she said.

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Time large purchases carefully

The higher rates are now helping people forgo large purchases. Look no further than the housing market.

But the financial twists and turns of life don’t always align well with Fed policy. “You can’t time your kids off to college. You can’t time when to go from place A to place B,” Sinha said.

It becomes a matter of separating ‘desired’ purchases from ‘essentials’. People who determine they have yet to buy a car or house should remember that they can always refinance later, advisers say.

If you decide to pause a large purchase, choose a certain threshold as a starting point to resume the search. These can be interest rates that fall a certain level, or asking prices for a car or house.

While waiting, avoid putting money back on the stock market for a house, they said. The volatility and risk of loss outweigh the probability of short-term gains.

Safe, liquid havens like a money market fund or even a savings account — which enjoy a rising Annual Percentage Yield (APY) due to interest rate hikes — can be a safe place to park cash ready to go when a buying opportunity suddenly arises and feels right.

According to Ken Tumin, Founding Editor of DepositAccounts.com, the average APYs for online savings accounts rose to 1.81% from 0.54% in May, while online one-year certificates of deposit (CDs) rose from 1.01% to 2. 67%. in May.

Also read: Opinion: surprise! CDs are back in vogue with government bonds and I-bonds as safe haven for your money

Portfolio rebalancing for difficult times

The standard rules always apply: Long-term investors with at least 10 years of investment should remain fully invested, Sinha said. The havoc the stock is having now could lead to bargains later, he said, but people should consider jacking up their fixed income exposure, at least in line with their risk tolerance.

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That can already start with government bonds. “We’re in an environment where you get paid to be a saver,” he said. The fact is reflected in the rising yields on savings accounts, but also in the yields on 1-year Treasury bills TMUBMUSD01Y,
3.892%
and the 2-year note TMUBMUSD02Y,
4.014%,
he said. Yields for both hover around 4%, up from nearly 0% a year ago. So feel free to lean into that, he said.

When interest rates rise, bond prices tend to fall. Shorter-dated bonds, with less chance of interest rates driving down market value, have allure, said BlackRock’s Gargi Chaudhuri. “The short end of the investment-grade corporate bond curve remains attractive,” Chaudhuri, head of iShares Investment Strategy Americas, said in a note Tuesday.

“We remain more cautious on longer-dated bonds, as we believe yields could remain at current levels or even rise for some time to come,” Chaudhuri said. “We urge patience as we believe we will see more attractive levels to take longer-dated positions in the coming months.”

As for stocks, now think of stable and high quality, such as healthcare and pharmaceuticals, she said.

Whatever the range of stocks and bonds, make sure it’s not willy-nilly mix to mix, said Eric Cooper, a financial planner at Commonwealth Financial Group.

There must be thoughts and strategies in place and match a person’s stomach for risk and reward, now and in the future, he said. And don’t forget that the current pain in the stock market may pay off later. Ultimately, Cooper said, “what saves you is what crushes you now.”

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