It is the Fed’s fifth hike of six months and its third consecutive 75 basis point hike that will put upward pressure on other interest rates throughout the economy.
For consumers, the Fed’s move will again raise questions about where to park their savings for the best return and how to minimize their borrowing costs.
“Credit card rates are at their highest since 1995, mortgage rates at their highest since 2008, and car loan rates at their highest since 2012. With more rate hikes still to come, this will put another strain on the budgets of households with variable-rate debt like home equity and credit cards,” said Greg McBride, Chief Financial Analyst at Bankrate.com “On the positive side, savers are seeing high-yielding savings accounts and certificates of deposit at levels last seen in 2009.”
Here are some ways you can invest your money to benefit from rising interest rates and protect yourself from the downside.
Credit Cards: Minimize the bite
When the overnight rate – also known as the fed funds rate – rises, various lending rates that banks offer their customers usually follow.
So you can expect your credit card rates to increase within a few statements.
Currently, the average credit card rate is 18.16%, according to Bankrate.com, up from 16.3% at the start of the year.
Best advice: If you have balances on your credit cards — which typically have high variable interest rates — consider transferring them to a zero-interest balance transfer card, which locks in a zero interest rate between 12 and 21 months.
“It shuts you off [future] rate hikes, and it gives you a clear runway to pay off your debt once and for all,” McBride said.
Just make sure you find out what fees, if any, you may have to pay (such as a balance transfer fee or an annual fee) and what penalties apply if you make a late payment or miss a payment during the zero-rate period . The best strategy is always to withdraw as much of your existing balance as possible – and do it on time each month – before the zero-interest period ends. Otherwise, any remaining balance will be charged a new interest rate, which could be higher than before if interest rates continue to rise.
If you’re not transferring to a zero-rate debit card, another option might be to get a relatively low, fixed-rate personal loan.
Home loans: Secure fixed interest rates now
The 30-year fixed-rate mortgage rose an average of 6.02% for the week ended September 15 5.89% the week before, according to Freddie Mac. That’s more than double What it was in mid-September last year (2.86%) and significantly higher than at the beginning of this year (3.22%).
And mortgage rates can climb even further.
That is, “don’t rush into a big purchase that isn’t right for you just because interest rates might go down high. Buying a large item like a house or car that doesn’t fit into your budget is a recipe for trouble, regardless of how interest rates move in the future,” said Texas-based certified financial planner Lacy Rogers.
If you’re already a homeowner with an adjustable-rate home equity line of credit and have used part of it on a home improvement project, McBride recommends asking your lender if it’s possible to set the interest rate on your outstanding balance and effectively create a fixed-rate home equity loan. Let’s say you have a $50,000 line of credit but only used $20,000 for a home renovation. They would ask that a fixed rate be applied to the $20,000.
If that’s not possible, consider cashing out that balance by taking out a HELOC with another lender at a lower promotional rate, McBride suggested.
Bank savings: Take a look around
If you’re hoarding cash at big banks that have paid almost no interest on savings accounts and certificates of deposit, don’t expect that to change just because the Fed is raising rates, McBride said.
Because the big banks are swimming in deposits and don’t have to worry about new customers.
Thanks to paltry interest rates from big players, the average bank savings rate is now just 0.13%, up from 0.06% in January, according to Bankrate.com’s weekly survey of institutions Sept. 14. The average interest rate for a one-year CD is now 0.77% as of September 19 compared to 0.14% at the start of the year.
But online banks and credit unions are trying to attract more deposits to feed their thriving lending businesses, McBride said. Consequently, they offer far higher interest rates and have increased them as benchmark rates have risen.
So look around. Today, some online savings accounts pay over 2%. And high-yielding annual CDs offer up to 2.50%. However, if you want to switch, be sure to only select federally insured online banks and savings banks.
Another high-yield savings option
However, this rate only applies for six months and only if you buy an I-Bond by the end of October, after which the rate should adjust. When inflation goes down, the interest rate on the I-Bond goes down as well.
There are some limitations. You can only invest $10,000 per year. You cannot redeem it in the first year. And if you pay out between the second and fifth year, the interest from the last three months will be forfeited.
“In other words, I-Bonds are not a substitute for your savings account,” McBride said.
Still, they preserve the purchasing power of your $10,000 if you don’t have to touch it for at least five years, and that’s not nothing. They can also be of particular benefit to those planning to retire in the next 5 to 10 years, as they serve as a safe annual investment to fall back on if needed during the early years of retirement.
If inflation proves stubborn despite higher interest rates, you might also consider putting some money into Treasury inflation-linked securities (TIPS), said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.
Equities: Aim for broad exposure and pricing power
The bewildering mix of factors at play in markets today makes it difficult to say which sector, asset class or company is certain to do well in a rising interest rate environment, Ma noted.
“It’s not just rising rates and inflation, there are geopolitical concerns… And we have a slowdown that may or may not lead to a recession… It’s an unusual, even rare, mix of factors,” he said.
For example, financial services companies can do well in a rising interest rate environment because, among other things, they can make more money on loans. But if there is an economic slowdown, a bank’s overall lending volume could fall.
Regarding real estate, Ma said, “the significantly higher interest rates and mortgage rates are challenging … and these headwinds could continue for a few more quarters or even longer.”
Meanwhile, he added: “Commodities have fallen in price but still a good hedge given the uncertainty in energy markets.”
He remains bullish on value stocks, especially small caps, which have outperformed this year. “We assume that this outperformance will continue for several years in the future”, he said.
That is, if you plan to invest For a particular stock, consider the company’s pricing power and how consistent demand for its product is likely to be. For example, tech companies typically don’t benefit from rising interest rates. However, as cloud and software service providers offer customers subscription prices, those could rise with inflation, said certified financial planner Doug Flynn, co-founder of Flynn Zito Capital Management.
Bonds: go short
If you already own bonds, the prices of your bonds will fall in an environment of rising interest rates. But when you’re in the market, buy bonds can benefit from this trend, especially if you buy short-term bonds, ie one to three years. That’s because Their prices have fallen more than long-dated bonds and their yields have risen more. Normally, short-term and long-term bonds move in parallel.
“There’s a pretty good opportunity short-term bonds that are badly contorted,” Flynn said. “For those in higher income tax brackets, a similar opportunity exists in tax-free municipal bonds.”
Ma added that 2-year Treasuries, yielding nearly 4%, “are attractive here as we don’t expect the Fed to go much beyond this level on short-term interest rates.”
Muni prices have fallen significantly, yields have risen, and many states are in better financial shape than they were before the pandemic, Flynn noted.
Other assets that could do well are so-called floating rate instruments from companies that need to raise cash, Flynn said. The floating rate is tied to a short-term reference rate like the fed funds rate, so it will rise if the Fed hikes rates.
But unless you’re a bond expert, you’d be better off investing in a fund that specializes in making the most of a rising-rate environment through floating-rate instruments and other bond-yield strategies. Flynn recommends looking for a strategic income or flexible income mutual fund or ETF that holds a range of different types of bonds.
“I don’t see many of those opportunities in 401(k)s,” he said. However, you can always ask your 401(k) provider to add the option to your employer’s plan.