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

The Fed is ready to bring the pain. Are you prepared?

Weeks ago, Federal Reserve Chair Jerome Powell cautioned there would be “some pain to households and businesses” as the central bank jacks up interest rates to fight inflation that’s higher than it’s been in four decades.

Powell and other members of the Fed’s Federal Open Market Committee matched Wall Street expectations Wednesday with a 75-basis-point hike to the federal funds rate, a repeat of the Fed’s previous decisions in June and July. That increase will once again impact credit-card rates, car loans, mortgages and of course, investment portfolio balances.

This brings the policy rate to a range of 3% to 3.25%. At this point last year, it was near 0%. But the Fed is now penciling in an additional 125-basis-point increase before year’s end. “We will keep at it until the job is done,” Powell said in a press conference following the announcement.

The average annual percentage rate on a new credit card is now 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.

None of this has 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 down by multiple worries, a hawkish Fed included. Choppy trading in the afternoon turned lower after the announcement and Powell’s remarks. Markets closed sharply lower Wednesday and continued the skid on Thursday.

By early afternoon Thursday, the Dow was off 92 points, or 0.3%, while the S&P 500 was down 29 points, or 0.8%. The Nasdaq Composite
lost 159 points, or 1.4%.

‘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 10 people say they’re moderately or extremely concerned about rising interest rates, according to a survey released Tuesday by Nationwide Agency Forward, a research initiative within Nationwide, the insurance and financial services company. The survey showed more than two-thirds expect rates to go higher, potentially much higher, in the coming six months.

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, 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 said.

But experts advise that people shouldn’t take the Fed’s decision lying down. Getting debt under control, timing major rate-sensitive purchases and considering portfolio rebalances can help dull the financial pain.

Pay down debt as soon as you can

Americans had approximately $890 billion in credit-card debt through the second quarter of 2022, according to the Federal Reserve Bank of New York. A new survey suggests that more people are holding onto their debts longer — and with rising APRs making it more expensive to carry a balance, they are likely paying more interest as a result.

Focus on chipping away at high-interest debt, experts say. There are very few investment products offering double-digit returns, so it pays to get rid of credit-card balances with double-digit APRs, they note.

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

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

From there, people can see where they can cut costs. If tradeoffs get tough, Greenhalgh brings it back to what’s causing the most 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 are helping dissuade people from making big purchases. Look no further than the housing market.

But life’s financial twists and turns don’t always mesh 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,” said Voya’s Sinha.

It’s a matter of categorizing purchases into “wants” and “needs.” And people who decide they need to proceed with buying a car or a house should remember they can always refinance later, advisers say.

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

While you’re waiting, avoid putting any down-payment money back into the stock market, the financial advisers say. 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 because of rate hikes — can be a safe place to park money that will be ready to go if a buying opportunity appears.

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 of investing still apply: Long-term investors with a timeline of at least 10 years should stay completely invested, said Sinha. The havoc for stocks now may present bargains that will pay 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. That’s reflected in the rising yields on savings accounts and also in the yields on 1-year Treasury bills
and 2-year notes
he said. Yields for both are hovering at 4%, up 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 a willy-nilly mix for the sake of mixing, said Eric Cooper, a financial planner at Commonwealth Financial Group.

Any rebalancing should be based on well-thought-out strategies and should match a person’s stomach for risk and reward, both 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 [in the long term] is what’s crushing you now.”

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