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: 4 ways to protect your finances right now from the Fed’s 1/2 point rate hike: ‘When uncertainty begins to occur, people tend to freeze’

Sharpen your talons, because it’s time to channel your inner hawk.

With Federal Reserve Chairman Jerome Powell signaling his willingness to swoop on inflation with interest rate increases steeper than March’s first hike, financial experts say people who can successfully respond to a rising-rate environment can more easily navigate the uncertainty ahead.

Take a moment to recalibrate investment portfolios, moving extra fast to extinguish pending credit-card debts and lock in rates as soon as possible for any upcoming big-ticket purchases like cars and homes, financial adviser say.

On Wednesday, the Fed raised the federal funds rate by a half point, a widely-expected move as the fight against inflation continues.

It’s the largest increase since 2000, and there could be more to come, Powell hinted at Wednesday’s press conference. “There is a broad sense on the [Federal Open Market Committee] that additional 50-basis point increases should be on the table at the next couple of meetings,” Powell said, adding the committee will make its data-driven determinations as it goes.

“Inflation is much too high and we understand the hardship it is causing, and we are moving expeditiously to bring it back down,” Powell said Wednesday.

Markets bounced up in Wednesday afternoon trading, soaking in Powell’s telegraphed move.

“A person’s real fight, experts say, is understanding their emotions and financial capabilities in this moment.”

In March, the Fed made a quarter percentage point hike, from near zero. Powell told the International Monetary Fund forum last month, “It is appropriate in my view to be moving a little more quickly. I also think there’s something in the idea of front-end loading whatever accommodation one thinks is appropriate.” Some regarded that comment as a signal of “peak hawkishness” to come.

Don’t fight the Fed, as the saying goes. A person’s real fight, experts say, is understanding their emotions and financial capabilities in this moment — and making the best of it during a volatile stock market not helped by the drumbeat of another possible recession.

“When uncertainty begins to occur, people tend to freeze. They are not sure what to do, so they end up doing nothing,” said Brian Stivers, of Stivers Financial Services in Knoxville, Tenn. “We almost make the changes when it’s too late.”

Here’s ways to avoid being too late, according to financial planning experts.

1. Step up the fight against debt

Within a month of the Fed’s first rate hike, three-quarters of approximately 200 new offers on credit cards increased their annual percentage rate (APR) by a quarter percentage point, according to Matt Schulz, LendingTree’s chief credit analyst.

For all forms of credit cards, including balance transfers and rewards cards, the average APR increased to 19.68% in April from 19.62% in March, according to LendingTree data.

If you haven’t seen the higher APR on the credit card you already have, just wait. Elevated APRs are coming on existing accounts within one or two billing cycles, Schulz said. And that’s just the ripples of the March 25-basis point hike to the federal funds rate, not even what’s next.

“‘There is a lot of advice about getting a balance-transfer card before rates go up, but that doesn’t reduce debt, it only shuffles it around.’”

— Matt Schulz, LendingTree’s chief credit analyst

“Your credit card debt is going to get more expensive in a hurry, and it’s not going to stop anytime soon,” Schulz said. The added borrowing costs could be small for one or two APR increases, but think about the cumulative costs of multiple hikes and it looks different.

This is why it’s so important to pay off as much credit-card debt as soon as possible, say Schulz, Stivers and others.

“We want people to keep debt reduction at the front of their minds. There is a lot of advice about getting a balance-transfer card before rates go up, but that doesn’t reduce debt, it only shuffles it around. Having a plan to pay down debts aggressively is the better course of action,” said Melinda Opperman, president at Credit.org, a non-profit organization focused on debt relief and financial education.

It sounds difficult wringing out more cash to pay down debts when inflation is stretching so many households thin, said Ana Gonzalez Ribeiro, an accredited financial counselor. But it can be done by getting back to the basics, said Gonzalez Ribeiro, of Rise Up Financial Coaching, serving clients in the Bronx and Westchester, N.Y.

That means reviewing your budget with a new mindset that the cost of debt is rising, or having a professional or even trusted friend or relative give it fresh eyes, she said. What actually are the needs and wants? Which services are getting used and which are not? “Every little bit helps, and it really adds up,” she said.

2. Spot a chance for more savings

When the Fed’s short-term interest rate increases, so do credit card rates. The annual percentage yield (APY) rates also rise on savings accounts and other conservative money vehicles.

Average April APYs for online high-yield savings accounts reached 0.54% in May, up from 0.50% in April, according to Ken Tumin, DepositAccounts.com’s founder and editor. An online one-year certificate of deposit (CD) is now an average 1.01%, up from 0.74% in April and it’s 1.70% for a five-year CD online, up from 1.23% a month ago.

For anyone who doesn’t have revolving credit card debts to deal with, this could be a moment to try socking away more in order to capitalize on the moment, Stivers said.

“‘Saving is more about setting specific goals — like the fabled six to nine month’s income—and reaching them.’”

— Melinda Opperman, president at Credit.org

For example, this is a move for people who may be paying more on top of their mortgage payments — for a mortgage at a low rate up to 4% — and can afford to re-direct that money elsewhere. “You might as well get a ride out of that interest now, while you can,” he said.

Others say the move shouldn’t be about eking more out of an APY.

Savings accounts can reap higher returns in this environment but they are not likely to beat inflation rates — so it’s important to remember the point of these accounts is filling a household budget backstop, Opperman noted. “Saving is more about setting specific goals — like the fabled six to nine month’s income—and reaching them. Interest earned is a nice bonus, but the point is to have funds on hand to weather a crisis,” she said.

3. Investment alterations

So far, 2022 has been lousy for the stock market. Don’t forget nerve-wracking. Friday ended with a nasty April finish. Then came Monday’s late-day rally, raising the Dow Jones Industrial Average
DJIA,
+2.14%
,
S&P 500
SPX,
+2.29%

and Nasdaq Composite
COMP,
+2.45%
.
And this is just with one Fed meeting under the belt.

How can investors get ahead if it’s tough enough just keeping their portfolio above water for the moment? Avoid sudden, drastic decisons, advisers say, but feel free to make some moves.

“‘If you do have bonds, keep duration short.’”

— Tom Balcom, founder of 1650 Wealth Management in Lauderdale-by-the-Sea, Fla.

“I love index investing,” said Stivers (who’s in good company there). But with its broad diversification there are many stocks that are “suffering,” he said. That’s why Stivers suggests redudcing allocation to overall indices and pouring money into sector investing via ETFs and mutual funds.

In Stivers’ view, sectors ripe for upside potential include consumer staples, energy and banking. Investing in ETFs linked to gold and commodities are one way to play defense, he said.

Speaking of defense, when interest rates rise, bond prices fall. They can still be a worthwhile part of a portfolio’s backstop, said Tom Balcom, founder of 1650 Wealth Management in Lauderdale-by-the-Sea, Fla. They are there “not as a return generator, more as a risk mitigator,” he said. A warning though in a rising-rate environment, Balcom added, “If you do have bonds, keep duration short.”

4. Leaning towards a major purchase? Do this.

Firm up the rate on a mortgage or car loan as soon as possible, Gonzalez Ribeiro and Stivers said. “The sooner you lock, the better,” Stivers noted. Relatedly, in any choices between variable and fixed rate loans, opt for the fixed rate, Balcom said. “Rates are only going in one direction,” he said.

To be clear, Stivers isn’t saying anyone needs to rush into these transactions right now — not when the housing market is so costly now and the supply chains for automobiles are still unsnagging.

But for anyone who’s already shopping, this is a good tactic to nail down costs in a time of rising interest rates and prices. Several of Stivers clients have asked him whether to commit to rates on upcoming home purchases, and he’s said yes each time.

“If making any choices between variable and fixed rate loans, opt for the fixed rate.”

The 30-year fixed rate mortgage stood at 5.1% for April’s last full week, Freddie Mac
FMCC,
+2.60%

said. While barely lower from the previous week — down by one basis point — Freddie Mac forecasters note the trend is likely to keep pushing up.

The central bank’s Federal Open Market Committee announced the 25-basis point increase on March 16. That same day, the average rate on a five-year loan for a new car was 4%, according to Bankrate.com. As of April 27, the rate for the same loan was 4.47%, the site said.

“If you don’t desperately need a car, don’t go buy one now,” he said, later adding, “If you know you are going to have to do it, you might as well go ahead and lock in the rate now.”

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