Americans should stay calm, bolster their personal savings and keep an eye on their long-term financial plan as the Federal Reserve sharply hikes interest rates, personal finance experts told The Post.
The Fed hiked 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 lowers inflation by cooling spending.
Fed interest rate hikes reverberate through the US economy, impacting credit card interest rates, auto loans, savings accounts and hampering the buying power of ordinary Americans.
They also have an indirect effect on mortgage rates, which have increased more than 3% since the start of the year to more than 6% for a long-term contract.
Despite the difficult conditions, households can make some common-sense moves to maintain a solid short-term and long-term budget, the personal finance experts said.
“Don’t panic,” said Jacob Channel, a senior economist at LendingTree. “What you absolutely shouldn’t do in a period like this is panic and think the sky is falling. If you do that, you’re more likely to make risky decisions like panic-selling all of your stocks or rushing into a bad real estate deal.”
To start, Americans should focus on “paying down high-cost debt and boosting emergency savings,” according to Greg McBride, chief financial analyst at Bankrate.
“As many learned during the pandemic, nothing helps bridge a period of income disruption like having money tucked away for a rainy day,” McBride said. “Now is the time to be boosting that emergency savings to put you on more solid footing for whatever may lie ahead for the economy.”
Budget-conscious Americans should focus on “protection strategies” for their finances in the present economic environment, according to Kelly LaVigne, vice president of consumer insights at Allianz Life. That includes cutting down on unnecessary purchases, even if items are discounted by retailers desperate to clear inventory.
“If we can avoid that, especially if you’re buying on credit, you’re going to be charged more in interest than you’ve actually saved on the purchase,” LaVigne said. “You’ve got to be careful not to spend too much on the items that you don’t absolutely positively need.”
Higher borrowing costs add to the pain for Americans during a period of high inflation. Prices ran at a hotter-than-expected 8.3% in August, with food and shelter costs hovering at their highest level in decades even as gas prices declined from record highs.
Fed Chair Jerome Powell has personally acknowledged that the central bank will keep hiking rates until inflation meaningfully declines — even if that means “some pain” for American households.
Aside from boosting their liquid cash holdings as much as possible, consumers should seek “safe havens” for their money in the form of federally insured savings accounts and government-backed bonds.
Yields on two-year Treasury notes topped 4% ahead of the Fed’s announcement.
“Government-backed bonds are always a good option in a period of time when the economy is a little bit shaky and maybe a downturn is on the horizon, just because they provide such a safe return on investment over a given period of time,” said Channel.
Precious metals such as silver and gold, traditionally seen as a hedge against economic volatility, are also “usually decent long-term investments,” according to Channel.
The housing market is a more troubling proposition. Prospective buyers are facing the dual crunch of higher mortgage rates and still-high listing prices, while would-be sellers are confronting dwindling demand and the need to secure their own new mortgage when rates are at a 14-year high.
The overall housing market is in better shape than it was during the Great Recession — with far fewer homeowners possessing “underwater” mortgages with balances that exceed the values of their homes. Still, buying activity is likely to remain muted as the Fed hikes rates.
“This is not a great time to buy a house because of the high home prices, the high mortgage rates and still fairly limited inventory to choose from,” said McBride. “I think that environment for homebuyers will get better, but it will probably take a weaker economy to do that.”
While cash savings are an important element 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 retirement savings and continue making their normal contributions to 401(k) and IRA plans.
“Don’t be pulling Social Security just because it’s there and it could help you over this short-term hardship,” said LaVigne. “If you absolutely positively need the money, if you’re 62 or older, certainly you’re going to have to claim that benefit, but we have to look at the 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 fire sales of their stock holdings as the market slumps — and even look for buying opportunities with staple corporate names that have become cheap.
“It’s the discipline of continuing to contribute and hanging on through the rough patches that rewards patient and disciplined investors over time,” said McBride.
“Don’t bail on your investments,” he added. “Don’t succumb to the knee-jerk reaction of selling in the face of volatile markets thinking you’re going to get back in later at a better time.”