Bless you, the Fed is about to inject ‘some pain’ to fight inflation – here’s how to prepare your wallet and portfolio

Bless you, the Fed is about to inject ‘some pain’ to fight inflation – here’s how to prepare your wallet and portfolio

A week ago, Federal Reserve Chairman Jerome Powell warned that there would be “some pain for households and businesses” as the central bank continued to raise interest rates to try to combat four-decade high inflation.

Wall Street widely 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 evening how much it will raise its main interest rate. Increasing credit card rates, car loans, mortgages and, of course, investment portfolio balances will eventually have an impact.

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.

Now, average annual percentage rates on new credit cards are 18.10%, up from April’s 18.12% last seen in January 1996. Car loans have reached 5% and mortgage rates have hit 6% for the first time since 2008 towards.

The movements were not lost on Wall Street. Dow Jones Industrial Average DJIA,
down 15.5% year to date and the S&P 500 SPX,
It is from more than 19%, dragged by multiple concerns, including hawkish nutrition.

‘I believe the Fed will have to cause pain if they want to keep their credibility, which we believe they will, and if they really want to bring 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 very worried about rising interest rates, according to a Nationwide survey released Tuesday. More than two-thirds expect rates to be much higher in the next six months.

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

“I believe the Fed will have to inflict pain if they want to maintain their credibility, which we believe they will, and if they want to bring inflation under control,” Sinha said.

But experts advise against setting the Fed’s decision. Get debt under control, consider timing large, rate-sensitive purchases and eye portfolio rebalancing could be ways to ease the financial pain ahead.

Pay off debt as soon as you can

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

Focus on chipping away at high-interest debt, experts say. Very few investment products have a good bet for double-digit future returns, so get rid of double-digit APRs on those credit card balances, they note.

It’s doable, even with inflation above 8%, said financial advisor Susan Greenhalgh, president of Mind Your Money, LLC in Hope, R.I. Start by writing down each debt, breaking out the principal and interest . Then group all the income and expenses into a time period, listing the expenses from small to large, she said.

The “visual connection” is key, she said. People may be very picky about how they’re spending money, Greenlagh said, but “when you see it in black and white, you don’t know.”

From there, people can see where they can cut costs. If a tough trade-off succeeds, Greenlagh backs it into financial pain. “If the debt is causing more pain than cutting or adjusting some of the spending, you cut or adjust in favor of paying off the debt,” she said.

Make large purchases carefully

The higher rates are now helping to discourage people from making large purchases. Look no further than the housing market.

But life’s financial twists and turns don’t always sit well with nutritional policies. “You can’t time your kids to go to college. You can’t take the time you have to move from place A to place B,” said Sinha.

It becomes a question of separating “wanted” purchases from “needs.” People who decide they must go ahead with buying a car or home should remember they can always refinance later, advisers say.

If you decide to pause a bulk purchase, select some portal as a re-entry point to resume the search. That could be interest rates dropping to a certain level, or asking prices on a car or house.

While you’re waiting, avoid putting your down payment money back on the stock market, they said. The volatility and risk of loss outweighs the chance of short-term gains.

Liquid safe havens like a money market fund or even a savings account — which is enjoying an increased annual percentage yield (APY) due to rate hikes — can be a safe place to park money that’s ready to go if it comes A buying opportunity suddenly arises and feels right.

The average APAs for online savings accounts have risen to 1.81% from 0.54% in May, according to Ken Tumin, founder and editor of, and online one-year certificates of deposit (CDs) have risen to 2.67% from 1.01% in May.

Also read: Opinion: Surprise! CDs are back in vogue with Treasurys and I-bonds as safe havens for your money

Portfolio rebalancing for rocky times

The standard rules always apply: long-term investors with at least 10 years of investment should stay fully invested, Sinha said. Markets may pay off later because of the blame for stocks now, he said, but people should consider increasing their exposure to fixed income, at least according to their risk tolerance.

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

As interest rates rise, bond prices usually fall. Shorter bonds have a chance, and interest rates are less likely to reduce market value, 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 are even more cautious on longer-dated bonds as we feel that rates can remain at current levels for some time or even rise,” Chaudhuri said. “We recommend patience as we believe we will see more attractive levels to enter longer-term jobs in the coming months.”

For equities, think stable and high quality right now, like the healthcare and pharmaceutical sectors, she said.

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

There should be thinking and strategies and matching one’s stomach for risk and reward now and in the future, he said. And remember, current equity market pain may pay off later. Ultimately, Cooper said, what’s going to save you is what’s bothering you now.”

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