Brace yourselves, the Fed is about to inflict ‘some pain’ to fight inflation — here’s how to prepare your wallet and portfolio

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

Wall Street expects another 75 basis point increase in the federal funds rate, which would be a repeat of the Fed’s previous decisions in June and July.

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

If the Fed reveals another increase of 75 basis points, that would bring the policy rate to a range of 3% to 3.25%. It was close to 0% at the same point last year.

Average annual percentage rates for a new credit card are now 18.10%, close to an APR of 18.12% last seen in January 1996. Car loans have reached 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,
is down 15.5% year to date and the S&P 500 SPX,
is off more than 19%, dragged down by multiple concerns, including a hawkish Fed.

“I think the Fed is going to have to cause pain if they want to maintain their credibility, which we think they will, and if they’re really looking to get inflation under control.”

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

Six in ten people say they are moderately or extremely worried about rising interest rates, according to a Nationwide survey released on Tuesday. More than two-thirds expect rates to potentially rise much higher in the next six months.

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

“I think the Fed is going to have to cause pain if it wants to maintain its credibility, which we think it will, and if they’re really looking to get inflation under control,” Sinha noted.

But experts advise not to take the decision of the Fed that establishes. Getting debt under control, thinking about the timing of important, rate-sensitive purchases, and visual portfolio rebalancing can all be ways to ease the financial pain ahead.

Pay off the debt as soon as you can

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

Focus on reducing high-interest debt, experts say. There are very few investment products with a good bet for double-digit future returns, so ditch the double-digit APRs on those credit card balances, they point out.

It can be done, even with inflation above 8 percent, said financial counselor Susan Greenhalgh, president of Mind Your Money, LLC in Hope, R.I. Start by writing down all your debts, breaking down principal and interest. Then group together all the income and expenses over a period of time, listing the expenses from big to small, he said.

The “visual connection” is crucial, he said. People may have intuitions 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 cut costs. If the exchanges get tough, Greenlagh is back in financial pain. “If the debt is causing more pain than cutting or adjusting some of the spending, then it is cut or adjusted in favor of paying down the debt,” he said.

Time big purchases carefully

Higher rates now help deter people from making large purchases. Look no further than the housing market.

But life’s financial twists and turns don’t always mesh well with Fed policies. “You can’t time when your kids go to college. You can’t time when you need to move from place A to place B,” Sinha said.

It’s about separating “wanted” purchases from “essential” purchases. People who determine they still need to proceed with a car or home purchase should remember that they can always refinance later, advisers say.

If you decide to pause a major purchase, choose some threshold as a re-entry point to resume your search. Interest rates may drop a certain level or asking prices for a car or a house.

While you wait, avoid putting your down payment money into the stock market, they said. Volatility and risk of loss outweigh the potential for short-term gains.

Safe, liquid havens like a money market fund or even a savings account, which enjoy rising annual percentage returns (APYs) due to rate hikes, can be a safe place to park money that’s ready if a buying opportunity suddenly appears and feels right.

Average APYs for online savings accounts rose to 1.81% from 0.54% in May, according to Ken Tumin, founder and publisher of, while certificates of deposit (CDs) d ‘one year online have risen to 2.67% from 1.01%. in may

Read also: Opinion: Surprise! CDs are back in fashion with Treasurys and I-bonds as a safe haven for your cash

Rebalancing your portfolio for tough times

Standard rules always apply: Long-term investors with at least 10 years of investment should stay fully invested, Sinha said. The chaos for stocks now may present deals that pay off later, he said, but people should consider increasing their exposure to fixed income, at least according to their risk tolerance.

This can start with government bonds. “We’re in an environment where you get paid to be a saver,” he said. It is a fact that is reflected in the increase in yields on savings accounts, but also in the yields on 1-year Treasury bills TMUBMUSD01Y,
and the 2-year ticket TMUBMUSD02Y,
he said Yields on both are at 4%, up from near 0% a year ago. So feel free to lean on that, he said.

As interest rates rise, bond prices tend to fall. Shorter-duration bonds, with less chance of interest rates eroding market value, have an appeal, 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 on Tuesday.

“We remain more cautious on long-term bonds as we believe rates may remain at their current levels for some time or even rise,” Chaudhuri said. “We ask for patience as we believe we will see more attractive levels to enter longer positions in the coming months.”

As for stocks, think stable and high-quality right now, like the healthcare and pharmaceutical sectors, he said.

Whatever the variety of stocks and bonds, make sure it’s not intentionally mixed or not for the sake of mixing it, said Eric Cooper, a financial planner at Commonwealth Financial Group.

There should be thinking and strategies and combining a person’s stomach for risk and reward now and in the future, he said. And remember, current stock market pain could pay off later. Ultimately, Cooper said, what “is saving you is what’s crushing you now.”

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