How The Fed's Battle Against Inflation Affects Your Money In The Bank, Investments, Credit Card Bills And More

BY Benzinga | ECONOMIC | 11/28/23 09:37 AM EST

Inflation has been a prominent topic for several years, and most Americans are aware of the Federal Reserve’s efforts to combat it by raising interest rates. 

But not everyone realizes that these actions have far-reaching implications beyond those for prospective homebuyers.

The Federal Reserve has been on a mission to aggressively address inflation for nearly two years. Whether you’re a borrower, saver or investor, the consequences of this battle are hitting your wallet in various ways.

This month, the Federal Reserve held interest rates steady, maintaining the Federal Funds rate in the range of 5.25% to 5.5%??. This decision reflects the ongoing complexity and uncertainty in balancing economic growth and inflation control. Despite the Fed’s efforts over the past 20 months to tighten monetary policy, it remains unclear whether these measures are sufficiently restrictive to tame inflation, which still runs above the Fed’s 2% target??.

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As of September, annual inflation was at 3.4%, with core inflation, excluding volatile food and energy costs, at 3.7%??. The Fed’s decision to maintain the current interest rate range was influenced by the need to see how job and price data evolve before the next policy meeting in December??.

Fed Chair Jerome Powell acknowledged the possibility of further rate hikes if progress on inflation stalls but also expressed concern about the impact of rising market-based interest rates, such as Treasury bond yields and home mortgage rates, on the economy. For example, 30-year fixed-rate home mortgages were nearing 8%, a level close to a 25-year high??.

How does this latest interest rate increase affect your money?

High-Yield Savings And CDs: Expect More Favorable Rates

For those with high-yield savings accounts or certificates of deposit (CDs), the landscape shows promising signs with more favorable rates. The national average annual percentage yield (APY) for savings accounts is approximately 0.45%, according to the Federal Deposit Insurance Corp. In newer banks or credit unions, in particular, substantially higher rates are accessible. Online banks are now offering savings account deposits with APYs of 5% or more, often accompanied by low or no balance requirements.

When it comes to CDs, online banks are offering rates between 5% and 6%. CDs, known for their higher returns because of the necessity of locking in funds for a certain duration, show a shift in trend. Long-term rates are not significantly higher than short-term rates, contrary to the norm. 

Stock Market Investment: Prepare For Increased Volatility

For stock market investors, the near future may present increased volatility. Despite a year-to-date rise of about 8.5% in the S&P 500 as of Oct. 31, the gains have lacked consistency and breadth, indicating an incomplete market recovery from early 2022. 

A few large tech stocks have primarily fueled the recent market rally. Credit Sesame financial analyst Richard Barrington advises diversifying investments into more reasonably priced sectors, noting the importance of a well-balanced portfolio. Given the unavoidable impact of rising inflation and interest rates on both corporate and consumer borrowing, he suggests a long-term investment horizon of at least three years to navigate through potential rate hikes and recessions effectively.

Homebuying And Mortgage Rates: Anticipate Higher Payments

Homebuyers or those with floating-rate mortgages should brace for higher monthly payments. Mortgage rates, which generally align with movements in the Federal Funds rate, have seen a sharp increase. The rate for a 30-year fixed-rate mortgage has reached nearly 8%, significantly higher than the average two years ago. Buyers are encountering elevated costs of homeownership and may need to consider alternative loan terms. Jill Fopiano, CEO of O’Brien Wealth Partners, advises understanding the details of variable-rate mortgages and preparing for higher payments or exploring the option of refinancing to a fixed-rate mortgage.

Credit Card Debt: Tougher Lending Standards

People with credit card debt are now facing stricter lending requirements. The escalation in inflation has led to an increase in credit card use, pushing interest rates to record highs, with the average for the week of Nov. 20 nearing 28%, according to Forbes. 

This trend is affecting credit scores and leading to higher delinquency rates, particularly among younger borrowers. In response, banks are tightening lending standards, especially for people with moderate to low credit scores. Fopiano recommends considering balance transfer cards with low- or zero-interest rate offers as a strategic approach to managing debt more efficiently.

Maximizing Financial Stability During Inflationary Times

A skilled financial adviser can provide personalized strategies to safeguard your finances against the impacts of inflation. They can offer insights on optimizing your investment portfolio, restructuring debts or adjusting savings plans to align with the current economic climate. Their expertise becomes crucial in interpreting how the Fed’s policies directly affect your financial goals, helping you make informed decisions to maintain or even enhance your financial stability during turbulent times.

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In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.