What to Do With Money When Fed Hikes Interest Rates

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Here’s what: Now’s a great time to save and invest strategically

The Federal Reserve hiked interest rates again this week by 0.75 percentage points. The aim is to cool the economy and bring high inflation under control, but repeated rate hikes will cause families and businesses “some pain” in the short term, as Fed Chair Jerome Powell put it.

If you’ve recently bought a home or borrowed money for your business, you’re no doubt acutely aware of this “pain.” Just this month, mortgage rates rose to 6% for the first time since 2008, an astronomical jump from their early-pandemic-era lows in the 2% range.

And while inflation is likely to eat up every extra dollar in your budget, there are some clever things you can do with your money right now to keep it growing while interest rates stay high.

Switch to a high-yield savings account

If you have savings in a typical bank savings account (which currently earns an average of 0.17%), don’t walk to open a high-yielding savings account. Many HYSAs are currently offering 2% or more. Make sure you choose an FDIC-insured account.

Buy I-bonds and short-dated bonds

The “I” in Series I savings bonds stands for inflation – meaning the interest rate on these bonds is linked to the rate of inflation (which we all know is sky high right now). Currently, Series I bonds pay 9.62%, and individuals can buy up to $10,000 annually.

“If you have cash that you’re sure you won’t need for 12 months, consider buying Series I bonds,” says financial planner Natalie Taylor. “Interest rates reset every six months, but if inflation and interest rates remain high, Series I bonds will continue to pay very attractive rates.”

Brian Mattox, vice president and chief investment officer at Kendall Capital, adds that buying shorter-dated bonds is lucrative right now. “Short-dated (two-year) government bonds pay as much or more than 10-year or even 30-year government bonds,” he says. Plus: “Short-term debt can be reinvested after maturity to earn even higher interest rates in a rapidly rising interest rate environment.”

Avoid variable rate debt

If you have to make a big purchase now, try not to use adjustable-rate debt. For example, if you’re buying a home, Taylor says, try to get a fixed-rate mortgage — you can always refinance later if interest rates fall again.

“The advantage of a fixed-rate mortgage is that your interest rate never changes, but with an adjustable-rate mortgage, your interest rate can go up if interest rates continue to rise,” she says.

Now is also a good time to consider balance transfer offers on your credit cards, since your monthly interest rate may change if the Fed hikes rates.

“If you have a large balance on your credit card, consider transferring the balance to a zero-rate balance transfer card, which sets a zero rate for a temporary period,” says financial planner Jovan Johnson.

Stick to your long-term investment plan

If you prefer to do absolutely nothing right now because thinking about money is so overwhelming, that’s fine. In fact, it’s the best thing you can do with your investments, especially your retirement savings.

“Stay true to your long-term investment plan,” says Mattox. “Don’t let the Fed’s interest rate movements and the resulting stock market volatility tempt you to make hasty, large-scale portfolio allocation changes.”

— Stephanie Hallett, Editor-in-Chief of Personal Finance Insider

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