What to do with money when the Fed raises interest rates

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Here’s what: It’s a good time to save and invest strategically

The Federal Reserve raised interest rates again this week, by 0.75 percentage points. The goal is to cool the economy and bring high inflation under control, but repeated hikes will “bring pain” to families and businesses in the short term, as Fed Chairman Jerome Powell has said.

If you’ve recently bought a house or been looking to borrow money for your business, you’re no doubt well aware of this “pain”. Just this month, mortgage rates jumped as high as 6% for the first time since 2008, an astronomical increase from their early pandemic-era lows in the 2% range.

And while inflation is likely eating away at every extra dollar in your budget, there are smart things you can do with your money right now to help it grow while interest rates stay high.

Switch to a High Yield Savings Account

If you have savings in a typical bank savings account (currently earning an average of 0.17%), run, don’t walk, to open a high-yield savings account. Many HYSAs currently offer 2% or more. Be sure to choose an FDIC-insured account.

Buy I bonds and short-term bonds

The “I” in Series I Savings Bonds stands for inflation – meaning that the rate offered by these bonds is tied to the rate of inflation (which, as we all know, is currently very high). Currently, Series I bonds yield 9.62% and individuals can purchase up to $10,000 per year.

“If you have cash that you’re sure you won’t need for 12 months, consider buying Series I bonds,” says financial planner Natalie Taylor. “Rates reset every six months, but if inflation and interest rates continue to be high, Series I bonds will continue to pay very attractive interest.”

Brian Mattox, vice president and chief investment officer at Kendall Capital, adds that buying short-term bonds is lucrative right now. “Shorter-term (two-year) Treasuries pay as much as or more than 10-year or even 30-year Treasuries,” he says. Additionally, “short-term debt securities can be reinvested after maturity to earn even higher rates in a rapidly rising rate environment.”

Avoid variable rate debt

If you need to make a large purchase right now, try to avoid using variable rate debt to make it. For example, says Taylor, if you’re buying a house, try locking in a fixed-rate mortgage — you can always refinance later if rates drop again.

“The advantage of a fixed rate mortgage is that your interest rate will never change, but with a variable rate mortgage your interest rate may increase if interest rates continue to rise” , she says.

Now is also a good time to consider balance transfer offers on your credit cards, as your monthly interest rate may change as the Fed raises rates.

“If you have a high balance on your credit card, consider transferring the balance to a zero-rate balance transfer card that locks in a zero rate for a temporary period,” says financial planner Jovan Johnson.

Stick to your long-term investment plan

If you’d rather do nothing right now because thinking about money is so overwhelming, that’s fine. In fact, it’s the best thing you can do with your investments, especially your retirement savings.

“Stick to your long-term investment plan,” says Mattox. “Don’t let the Fed’s interest rate movements and subsequent stock market volatility scare you into reckless, large-scale portfolio allocation changes.”

— Stephanie Hallett, editor of Personal Finance Insider

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