Two months ago economists were all but certain that the Fed would raise rates at its meeting this week. Now, not so much.
The slowdown in China, turmoil in the stock market and continued low inflation has some economists calling for the Fed to hold off on ending what’s been an unprecedented period of maintaining rock-bottom rates.
IMF head Christine Lagard joined the chorus last week. “The Fed has not raised interest rates in such a long time, that it should really do it for good, not give it a try and then have to come back,” she said at a press conference following a Group of 20 Meeting. “The IMF thinks that it is better to make sure that data are absolutely confirmed, that there is no uncertainty, neither on the front of price stability nor on the employment and unemployment front, before it actually makes that move.”
Whether the Fed raises rates this week or later in the year, it appears near certain they’ll go up sooner rather than later. Regardless of when the rate hike happens, it appears it will likely be a slow upward climb. “Any increases are going to be part of a very cautious, very extended program,” says Eleanor Blayney, consumer advocate for the CFP Board.
Related: 5 Reasons the Fed May Not Raise Rates in September
That means the immediate impact on consumers will be minimal. Still, as the economy moves into a rising rates environment, there are a few smart money moves that consumers can make to protect their wallets.
1. Re-evaluate your debts. Rising rates will hit variable loans the hardest, so if you’ve got an adjustable-rate mortgage or home equity loan, get ready to say goodbye to the record low rate you’ve been enjoying in recent years. “Definitely have a game plan for the debt repayment, particularly if you piled up that balance when rates were low,” says Bankrate chief financial analyst Greg McBride. “You don’t want to have to worry about paying it back at a higher rate later.”
For the mortgage, if you’re planning on staying in your home for the long-term, now’s a great time to get into a fixed-rate mortgage that will protect you from interest rate risk. If you know you’re going to move, look for an adjustable-rate mortgage with a time horizon that aligns with your plans.
As for the home equity loan, many banks will let you refinance an outstanding balance into a fixed rate. If you’ve got a project coming up that you’ll need to finance, it might make sense to do it as soon as possible so that you’re not stuck borrowing money at a much higher rate.
If you’ve got high interest credit card debt, make paying it off a priority. Depending on your credit profile, credit card companies can increase your interest rates at will from half a percentage point to about 2 or 3 percent in the worst case, as a result of Fed action. Higher rates won’t make a huge difference to your monthly payments, but the amount if you don’t pay in full that you owe will accumulate faster. There are still some good zero percent interest transfer offers out there, nab one and try to pay down your balance before the promotional period expires.
2. If you’re in the market for a home, get off the fence. Interest rates, of course, are not the only factor you should consider when buying a home, but if you’re planning to buy in the next few years, it may make sense to move sooner than later.
Related: For U.S. Banks, Depositors Could Spoil Joy of Higher Interest Rates
The Mortgage Bankers Association expects mortgage rates on 30-year fixed loans to hit 4.3 percent by the end of the year and rise to 5.2 percent by the end of next year. Even that increase will reduce purchasing power by about 10 percent, and there’s room for rates to go even higher. Their historical average is more than 8 percent. “Today’s mortgage rates remain an opportunity that you don’t want to miss,” says Richard Barrington, senior financial analyst at MoneyRates.
3. Be sure you’re comfortable with your investment mix. If you’re investing for the long-term, now is a great time to take a look at your asset allocation to be sure you’re well positioned to withstand continued volatility in the markets. If your target allocation has gotten out of whack following the recent decline in stock markets, re-allocate now.
If you have a shorter time horizon or are more heavily invested in bonds, shift your investments to shorter-term bonds, which are less impacted by interest rate changes. If you own a portfolio of individual bonds and plan to hold them to maturity, it doesn’t matter what rates do. “Yes, the value of individual bond holders’ portfolios might decline, but you didn’t buy them to make money, you bought them for income,” says Colorado financial planner Craig Karnick.
4. Shop around for savings. Once the rate hike hits, you won’t immediately see a huge increase on the interest that you’re earning on your savings accounts. Getting a better rate may require some leg work from you, since not all banks will immediately pass that rate increase on to their depositors. Shop around to see if you can find a more competitive rate at a different bank (online banks and credit unions tend to offer the best rates) and be prepared to shift your savings in order to get the better return.
If you keep savings in CDs, look for either shorter-term vehicles so you’re not locking your money up for or longer term CDs with low early-withdrawal penalties, or considering creating a laddered portfolio. “I view ladders as a great way to avoid remorse,” says Robert Martorana, a portfolio manager with Right Blend Investing. “If you know that every year 10 percent of your portfolio matures, then you have the option to do something else with it.”
