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

The federation is ready to bring the pain. Are you ready?

Weeks ago, Federal Reserve Chairman Jerome Powell warned that “there could be some pain in homes and businesses” as the central bank raises interest rates to fight the worst inflation in four decades.

Powell and other members of the Federal Open Market Committee matched Wall Street’s expectations for a 75-basis-point hike in the federal funds rate on Wednesday, the Fed’s previous decisions in June and July. That increase will affect credit card rates, car loans, mortgages and of course investment portfolio balances.

This brings the policy rate from 3% to 3.25% range. At this point last year it was about 0%. But the Fed is now in the lead for a 125-basis-point hike before the end of the year. “We will continue until the job is done,” Powell said at a press conference after the announcement.

The average annual percentage rate on the new credit card is now 18.10%, close to the 18.12% APR seen last January 1996. Car loans have reached 5% and since 2008 mortgage rates have reached 6%.

None of this was lost on Wall Street. The Dow Jones Industrial Average DJIA;
It is down 15.5% year to date and the S&P 500 SPX;
It’s off more than 19%, being dragged down by many worries, including the hawkish Fed. Afternoon trading was lower after the announcement and Powell’s comments. Markets closed much lower Wednesday and continued to slide on Thursday.

Early Thursday, the Dow was off 92 points, or 0.3%, while the S&P 500 was down 29 points, or 0.8%. NASDAQ COMPOSITION COMP,
They lost 159 points or 1.4 percent.

‘I believe that if the Fed wants to maintain their credibility and really want to control inflation, they can cause pain.’

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

Six in 10 people say they are somewhat or extremely concerned about rising interest rates, according to a survey released Tuesday by National Agency Forward, a research initiative at the National Insurance and Financial Services Firm. The survey found that more than two-thirds expect rates to rise, much higher, in the next six months.

The Fed is raising borrowing costs to ease demand and cool inflation, said Amit Sinha, managing director of Voya Financial’s asset management business and head of multi-asset design at Voya Investment Management.

Sinha said, “I believe that if they want to control inflation, the Fed should cause them pain.”

But experts advise people not to take the Fed’s decision lightly. Keeping debt under control, timing large purchases and keeping portfolio balance in mind can help ease the financial pain.

Pay off debt as soon as possible

By the second quarter of 2022, Americans had nearly $890 billion in credit card debt, according to the Federal Reserve Bank of New York. A new survey suggests that more people are holding on to their debt for longer — and as APRs rise, making it more expensive to hold a balance, they’re paying more interest as a result.

Focus on cutting high-interest debt, say experts. There are very few investment products that offer double-digit returns, so they say it pays to avoid credit card balances with double-digit APRs.

That’s possible even with inflation above 8 percent, said Susan Greenhalgh, president of Rhode Island-based financial advisor Mind Your Money LLC. Start by writing down all your debts, breaking down the principal and interest. Then add up all your income and expenses for a certain period of time, listing the expenses from the biggest to the smallest, she said.

“Eye contact” is critical, she said. People may have a clue about how they spend money, but you won’t know it until you see it in black and white.

Then people can see where they can cut costs. If transactions tighten, Greenhalgh will return it to what would be the most financial pain. “If the debt is causing you more pain than cutting back or fixing certain expenses, you cut and fix the debt to pay it off,” she said.

Carefully time large purchases

Higher prices are helping to dissuade people from making large purchases. Look no further than the housing market.

But life’s financial cycles don’t always line up with federal policies. “You don’t have time when your kids are in college. You can’t find the time you need to move from A to B,” says Voya Sinha.

Purchasing is a matter of classifying “want” and “want”. And people who decide they should go ahead with buying a car or a home should remember they can always refinance later, advisers say.

If you decide to stop a major purchase, select a re-entry point limit. That interest rates or asking price on a car or house may be going down somewhat.

Avoid putting any down payment money back into the stock market while you wait, say financial advisors. Volatility and risk of loss weigh short-term profit opportunities.

Safe, liquid places like money-market funds or savings accounts—those that enjoy increasing annual percentage yields because of equity increases—can be a safe place to park money ready to go if a buying opportunity presents itself. founder and editor Ken Tumin said yields on online one-year certificates of deposit (CDs) rose from 1.01% to 2.67% in May, from 0.54% to 1.81%. In May.

Also read: Comment: Amazing! CDs are back in business with Treasurys and I-bonds as safe havens for your money.

Balancing your portfolio for rocky times

Standard investment rules still apply: Long-term investors with a time horizon of at least 10 years should be fully invested, Sinha said. A crash in stocks now may offer a bargain later, but people should consider increasing their fixed income exposure with at least their risk tolerance, he said.

That could start with government bonds. “We’re in an environment where you get paid to be frugal,” he said. That was reflected in gains in savings accounts as well as 1-year Treasury bills TMUBMUSD01Y.
and 2-year notes TMUBMUSD02Y,
he said. Both products are hovering at 4%, which was almost 0% a year ago. So feel free to lean in there, he said.

When interest rates rise, bond prices typically fall. For short-term bonds, interest rates are less likely to erode market value, said BlackRock’s Gagi Chaudhry. “The short end of the investment-grade corporate-bond curve continues to be attractive,” Chowdhury, head of iShares Investment Strategy Americas, said in a Tuesday note.

“We are more cautious on long-dated bonds as we feel prices may remain at current levels or rise for some time,” Choudhury said. “We urge patience as we believe we will see more attractive levels of entry into longer positions over the next few months.”

As for equities, think stable and high-quality sectors like healthcare and pharmaceuticals, she said.

Whatever stock and bond deals, make sure it’s not a willy-nilly mix for the sake of mixing, says Eric Cooper, financial planner at Commonwealth Financial Group.

Any rebalancing must be based on well-thought-out strategies and must match one’s stomach for risk and reward now and in the future, he said. And remember, the equity market’s pain now may pay off later. Finally, Cooper asked, “What saves you? [in the long term] He’s crushing you right now.”

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