Americans need to stay calm, bolster their personal savings and watch their long-term financial plan as the Federal Reserve slashes interest rates, personal finance experts told The Post.
The Fed raised its benchmark interest rate by 0.75% on Wednesday for the third month in a row. By raising interest rates, the Federal Reserve is making it more expensive to borrow money, a policy move that reduces inflation by cooling spending.
Federal Reserve interest rate increases ripple through the US economy, affecting interest rates on credit cards, auto loans, savings accounts, and hampering Americans’ purchasing power common.
They also have an indirect effect on mortgage rates, which have risen more than 3% since the beginning of the year to more than 6% for a long-term contract.
Despite the tough conditions, households can make some common sense moves to maintain a solid budget in the short and long term, personal finance experts said.
“Don’t panic,” said Jacob Channel, senior economist at LendingTree. “What you absolutely should not do in a period like this is to panic and think that the sky is falling. If you do that, you’re more likely to make risky decisions, like panic selling all of your stock or rushing into a bad real estate deal.”
For starters, Americans should focus on “paying down high-cost debt and building emergency savings,” according to Greg McBride, chief financial analyst at Bankrate.
“As many have learned during the pandemic, nothing gets you through a period of income disruption like having money saved for a rainy day,” McBride said. “Now is the time to jumpstart those emergency savings to put you on a stronger footing for whatever the economy throws at you.”
Budget-conscious Americans should focus on “protective strategies” for their finances in the current economic environment, according to Kelly LaVigne, vice president of consumer insights for Allianz Life. That includes cutting back on unnecessary purchases, even if retailers desperate to clear inventory discount items.
“If we can get around that, especially if you’re buying on credit, you’ll be charged more interest than you actually saved on the purchase,” LaVigne said. “You have to be careful not to overspend on items that you absolutely positively don’t need.”
Higher borrowing costs are adding to the pain of Americans during a period of high inflation. Prices hit 8.3% higher than expected in August, with food and housing costs hovering around their highest level in decades, even as gasoline prices fell from record lows.
Fed Chairman Jerome Powell has personally acknowledged that the central bank will keep raising rates until inflation slows significantly, even if it means “some pain” for American households.
In addition to increasing 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.
Two-year Treasury yields topped 4% before the Fed’s announcement.
“Government-backed bonds are always a good option in a time period when the economy is a little shaky and maybe a recession is coming, just because they provide such a secure return on investment over a given period of time.” Channel said.
Precious metals like silver and gold, traditionally seen as a hedge against economic volatility, are also “generally decent long-term investments,” according to Channel.
The housing market is a more worrying proposition. Prospective buyers face the twin crises of higher mortgage rates and still-high listing prices, while would-be sellers face declining demand and the need to secure their own new mortgage when rates are at its highest level in 14 years.
The housing market overall 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 due to high home prices, high mortgage rates and still fairly limited inventory to choose from,” McBride said. “I think the environment for homebuyers will improve, but it will probably take a weaker economy to do that.”
While cash savings are an important element of preparation, experts stressed that Americans shouldn’t lose sight of their long-term savings plans just because the market is tight.
Consumers should avoid the temptation to dip into retirement savings and continue making their normal contributions to 401(k)s and IRAs.
“Don’t withdraw Social Security just because it’s there and it could help you get through this short-term hardship,” LaVigne said. “If you definitely need the money, if you’re 62 or older, you’ll certainly have to claim that benefit, but we have to look 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 plunges, and even look for buying opportunities with staple corporate names that have become cheaper.
“It is the discipline of continuing to contribute and weathering tough times that rewards patient and disciplined investors over time,” McBride said.
“Don’t give up on your investments,” he added. “Don’t succumb to the knee jerk reaction to sell to market volatility thinking it will come back later at a better time.”