Americans should stay calm, stock up on personal savings and keep an eye on their long-term fiscal plan as the Federal Reserve hikes interest rates sharply, personal finance experts told The Post.
The Fed hiked interest rates by 0.75% for the third straight month on Wednesday. By raising interest rates, the Fed is making borrowing more expensive — a policy move that lowers inflation by cutting spending.
The Fed’s rate hikes echo through the US economy, affecting interest rates on credit cards, car loans, savings accounts and affecting the purchasing power of ordinary Americans.
They are also indirectly affecting mortgage rates, which have risen by more than 3% year-to-date to over 6% for a long-term contract.
Despite the tough conditions, households can take some sensible steps to maintain a solid short- and long-term budget, the personal finance experts said.
“Don’t panic,” said Jacob Channel, senior economist at LendingTree. “What you absolutely should not do at a time like this is panic and think the sky is falling. When you do that, you’re more likely to make risky decisions, like panic selling all your stocks or rushing into a bad real estate deal.”
To start, Americans should focus on “paying off high-priced debt and increasing emergency savings,” according to Greg McBride, chief financial analyst at Bankrate.
“As many have learned during the pandemic, nothing does a better job of tackling a period of income disruption than stashing money away for a rainy day,” McBride said. “Now is the time to increase those emergency savings to put you on a firmer footing for whatever the economy may face.”
Budget-conscious Americans should focus on “protecting” their finances in the current economic environment, according to Kelly LaVigne, vice president of consumer insights at Allianz Life. This includes cutting back on unnecessary purchases, even as items are reduced by retailers desperate to clear stock.
“If we can avoid that, especially if you’re buying on credit, you’re going to be charged more interest than you actually saved when you bought it,” LaVigne said. “You have to be careful not to spend too much on things you don’t absolutely need.”
Higher borrowing costs are an additional concern for Americans during a period of high inflation. Prices came in higher-than-expected at 8.3% in August, with food and shelter costs teetering at their highest levels in decades, even as gas prices fell from record highs.
Fed Chair Jerome Powell has personally conceded that the Fed will keep raising rates until inflation falls significantly – even if it means “some pain” for American households.
In addition to increasing their liquidity reserves as much as possible, consumers should look for “safe havens” for their money in the form of federally insured savings accounts and government-guaranteed bonds.
Two-year Treasury bond yields topped 4% prior to the Fed’s announcement.
“Government bonds are always a good option at a time when the economy is a bit shaky and maybe a downturn is on the horizon just because they offer such a safe yield over a period of time,” Kanal said.
Precious metals like silver and gold, traditionally viewed as hedges against economic volatility, are also “usually decent long-term investments,” according to the Channel.
The housing market is a more worrying matter. Prospective buyers face the twin crises of higher mortgage rates and still-high listing prices, while prospective sellers face 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 holding “underwater” mortgages with balances that exceed the value of their homes. Still, buying activity is likely to remain subdued as the Fed hikes rates.
“This is not a good time to buy a home because of high house prices, high mortgage rates and still relatively limited inventory choices,” McBride said. “I think the environment for homebuyers will improve, but that will probably require a weaker economy.”
While saving cash is a key element of the preparations, experts stressed that Americans shouldn’t lose sight of their long-term savings plans just because the market is struggling.
Consumers should resist the temptation to dive into retirement savings and continue to make their normal contributions to 401(k) and IRA plans.
“Don’t pull Social Security out just because it’s there and could get you through this short-term need,” LaVigne said. “If you absolutely need the money if you’re 62 or older then you certainly need to take that benefit, but we have to look at things like Social Security over the long term. You don’t want to change your plan just because of a short-term event.”
Investors should also avoid fire selling their stock holdings when the market falls — and even look for buying opportunities in staples that have gone cheap.
“It’s the discipline of continuing to contribute and weathering the tough times that rewards patient and disciplined investors over time,” McBride said.
“Don’t vouch for your investments,” he added. “Don’t succumb to the knee-jerk reaction of selling in the face of volatile markets, assuming you’ll come back at a better time later.”