Meanwhile the stock market is up 12% for the year. Pundits have been warning of a recession for more than a year, even as employers created 4 million new jobs, including 339,000 in May, and the unemployment rate has hovered near historic lows. It’s not a given that the Fed will interest move sharply in either direction this year, particularly if economic data remain mixed. That means layoffs, and it’s a good reason to make sure you have a plump emergency fund -six to 12 months of living expenses is a good target. The bad news about lower rates, of course, is that they often signal recessions. If you think rates will fall and stay low for a few years, consider locking in upward of 4.5% on a three-year CD. Currently, lots of one-year CDs are yielding 5.25% -thus performing the historically rare feat of outpacing inflation of 4.9%. If the Fed does embark on a rate-cutting cycle, “your rate will come down and then you can refinance to a fixed-rate mortgage when rates are much lower.”įor savers who anticipate that rates will fall significantly, locking in a CD at today’s rates would seem smart. Frank is telling clients who want to buy homes now to consider using adjustable-rate mortgages. In that case, folks with higher mortgage rates can eventually refinance. In the event that the economy shows signs of weakness in the next few weeks, the Fed could reach for the rate-cutting scissors. If the Fed pulls away the football, stock prices could retreat. The tech-heavy Nasdaq exchange has done particularly well this year, rising 26% on expectations that the Fed would start cutting rates in the second half of the year. That means your emergency fund or home down payment fund won’t lose much buying power to inflation.Ĭonversely, t he stock market might not like rising rates. The top-yielding bank savings accounts are already paying nearly 5%. Rising rates are also good news for savers. It’s the opposite of what happened when years of rock-bottom interest rates drove home prices through the roof. The good news is that higher interest rates can have a constraining effect on home prices : By dampening demand, they force sellers to lower their prices. The average 30-year fixed mortgage is already around 7%, compared with less than 3% two years ago. Rising rates would hurt new mortgage borrowers. For instance, paying $500 per month on a 20% card that’s maxed out at $20,000 will take you five years, but if the rate goes to 25%, it will take an additional two years and three months. The national average interest rate for credit cards is already near 21%, and higher rates make it much harder to retire debt. “What’s really painful is to be deeply in debt and you can’t get out.” “It’s OK to not do an expensive vacation it’s OK to not have a shiny new car,” says financial adviser Jon Foster, in Los Angeles. If you are concerned the Fed will continue raising interest rates, even after a brief pause, it could make sense to forgo luxuries for a bit and focus on paying down adjustable-rate credit-card debt. While no one knows where interest rates are headed, here is how to prepare yourself for three basic scenarios. But the new direction also adds a big dose of uncertainty to many financial decisions, especially for savers who may be wondering whether to lock in today’s rates, or wait for possibly better ones later this year. If you’ve got credit card debt or are planning on taking out a mortgage, you no longer have to worry about rates immediately ratcheting higher. The Fed’s “pause” is good news for borrowers. “This is the Fed just kind of waiting and seeing,” says investment adviser Brian Frank, in Key Biscayne, Fla. And, of course, if the economy begins to weaken, as many economists predict, the Fed could move in the opposite direction and begin to cut rates. The Fed left open the possibility that it may resume rate hikes soon. In a statement following their June 13-14 meeting, Fed officials said they would leave the fed-funds rate at its current 5% to 5.25% level, at least for the time being. On Wednesday, the Fed finally changed course. Since then, however, inflation has gradually eased, falling from a peak of more than 9% to 4% in May. (Higher borrowing costs reduce the amount of money chasing goods and services.) Starting in March 2022, the central bank raised its benchmark federal-funds rate at 10 straight opportunities. The Federal Reserve began raising rates a little over a year ago in order to fight sharply rising prices. But if you’re a saver or a borrower, it can make money decisions a lot harder. Now inflation-the impetus for those higher rates-seems to be gradually coming under control. For months consumers have watched interest rates steadily climb.
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