Brace yourself, the Fed is about to inflict ‘some pain’ in its fight against inflation — here’s how to prepare your wallet and portfolio

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Weeks ago, Federal Reserve Chair Jerome Powell cautioned there would be “some pain to households and businesses” as the central bank kept jacking up interest rates to try fighting four-decade high inflation.

Wall Street is widely anticipating another 75-basis point increase for 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 afternoon just how much it will increase its key interest rate. An increase will ultimately impact credit-card rates, car loans, mortgages and, of course, investment portfolio balances.

If the Fed unveils another 75-basis point increase, that would bring the policy rate to a range of 3% to 3.25%. It was near 0% at the same point last year.

Now, average annual percentage rates on a new credit card are 18.10%, inching close to an 18.12% APR last seen in January 1996. Car loans have reached 5% and mortgage rates hit 6% for the first time since 2008.

The moves have not been lost on Wall Street. The Dow Jones Industrial Average

is down 15.5% year-to-date and the S&P 500

is off more than 19%, dragged by multiple worries, a hawkish Fed included.

‘I believe that the Fed will have to cause pain if they want to keep their credibility, which we believe they will, and if they are really looking 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’re moderately or extremely concerned about rising interest rates, according to a Nationwide survey released Tuesday. More than two-thirds expect rates to climb potentially much higher in the coming six months.

Don’t take it personally. 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, the asset management business of Voya Financial

“I believe that the Fed will have to cause pain if they want to keep their credibility, which we believe they will, and if they are really looking to bring inflation under control,” Sinha noted.

But experts advise not taking the Fed’s decision laying down. Get debt under control, think through the timing of major, rate-sensitive purchases and eye portfolio rebalances can be ways to dull the financial pain that lies ahead.

Pay down debt as soon as you can

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

Focus on trimming away high-interest debt, experts say. There’s very few investment products with a good bet of future double-digit returns, so get rid of double-digit APRs on those credit-card balances, they note.

It can be done, even with inflation above 8%, said financial counselor Susan Greenhalgh, president of Mind Your Money, LLC in Hope, R.I. Start by writing down all debts, breaking out the principal and interest. Then group all the income and spending in a period of time, listing the expenditures from big to small, she said.

The “visual connection” is crucial, she said. People may have hunches on how they’re spending money, said Greenlagh, but “until you see it black in white, you do not know.”

From there, people can see where they can nip costs. If trade-offs get tough, Greenlagh brings it back to financial pain. “If the debt is causing more pain than cutting or adjusting some of the spending, then you cut or adjust in favor of paying the debt,” she said.

Carefully time big purchases

The higher rates now are helping dissuade people from big purchases. Look no farther than the housing market.

But life’s financial twists and turns don’t always fit well with Fed policies. “You can’t time when your kids go to college. You can’t time when you need to move from place A to place B,” Sinha said.

It becomes a matter of separating “wanted” purchases from “essentials.” People who determine they still need to proceed with a car or house purchase should remember they can always refinance later, advisers say.

If you decide to pause major a major purchase, pick some threshold as a re-entry point to resume the search. That could be interest rates declining a certain level, or asking prices on a car or house.

While waiting, avoid putting down payment money for a house back in the stock market, they said. The volatility and risk of loss outweigh the chance of short-term gains.

Safe, liquid havens like a money-market fund or even a savings account — which are enjoying increasing annual percentage yields (APY) because of rate hikes — can be a safe place to park money that’s ready to go if a buying opportunity suddenly springs and feels right.

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

Read also: Opinion: Surprise! CDs are back in vogue with Treasurys and I-bonds as safe havens for your cash

Portfolio rebalance for rocky times

The standard rules always apply: long-term investors with at least 10 years of investment should stay completely invested, said Sinha. The havoc for stocks now may present bargains paying off later, he said, but people should consider boosting their fixed-income exposure, at least in line with their risk tolerance.

That can start with government bonds. “We’re in an environment where you are paid to be a saver,” he said. It’s a fact reflected in the rising yields on savings accounts, but also in the yields on 1-year Treasury bills

and the 2-year note
he said. Yields for both are hovering at 4%, rising from near 0% a year ago. So feel free to lean into that, he said.

As interest rates rise, bond prices typically fall. Shorter duration bonds, with less of a chance for interest rates to deplete market value, have allure, 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 Tuesday note.

“We remain more cautious on longer-dated bonds as we feel that rates can stay at their current levels for some time or even rise,” Chaudhuri said. “We urge patience as we believe we will see more attractive levels to enter longer-duration positions in the next few months.”

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

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

There should be thought and strategies and match a person’s stomach for risk and reward now and in the future, he said. And remember, the equity market’s current pain could pay off later. Ultimately, said Cooper, what’s “saving you is what’s crushing you now.”

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