Financial plans should not change as a result of interest rates, advisers say
Observer-Reporter (Washington, PA)
The Federal Reserve tossed a bucket of ice water on the economy this week by boosting its benchmark interest rate from 2.25% to 2.5% in an effort to bring runaway inflation under control.
This increase, combined with another 0.75% increase just weeks ago, are the largest rate hikes in years, and are a marked contrast to interest rates in the depths of the COVID-19 pandemic, when they were kept near zero. It has led many investors and everyday consumers to wonder how they should proceed in a volatile environment.
Should they purchase a new house, or get a new set of wheels? Or should they wait a while in the hope that interest rates – and, hopefully, prices – will come back to earth?
"If you find the home you like, or the car you want, you should go forward," according to Don Detts Jr., a certified financial planner with Wells Fargo Advisors in Southpointe.
Sara Botkin of Botkin Family Wealth Management in Peters Township agrees: "Don't allow these things to derail your long-term financial plans."
Detts and other financial advisers in the region pointed out that even though interest rates on a 30-year, fixed-rate mortgage are now at 5.54%, a little more than double what they were a year ago, rates are still well below what they were 40 years ago, when the Federal Reserve broke the back of inflation with punishing rate hikes. In those days, interest on fixed-rate mortgages could run as high as 13%.
"They're getting closer to normal," said Gary Boatman of Boatman Wealth Management in Monessen. "They've been low for so long."
On the other hand, homeowners who have adjustable-rate mortgages or lines of home equity credit will end up paying more due to the rate increases. Federal Reserve chair Jerome Powell hinted that another increase could be coming in September.
Rob Vettorel, a financial adviser with Washington Financial, pointed out that if you are looking to purchase a home now, and then sell it in three to five years, then you might not be able to make back your investment. But if you plan on staying in the home for several years, then you should be OK.
The interest rate on federal student loans are also fixed, so holders of outstanding loans will not see their rates go up. However, anyone who takes out a new loan will see a higher rate compared to what has been available in recent years.
No matter the season, financial planners also advise against carrying large amounts of credit card debt, and those rates will also be heading upward as a result of the interest rate increases. Those rates now average between 15% and 19%, and the amount of interest companies charge should be increasing within the next couple of billing cycles. According to Botkin, "We've always advised clients to carry low debt loads."
In contrast, the interest rate on savings has been abysmal over the last couple of years, and the Fed's rate increase will likely not immediately improve the outlook for anyone who has a lot of money stashed in the bank. Vettorel pointed out that banks are sitting on piles of cash and interest rates on savings go up when banks want deposits.
In the near-term, rising interest rates are expected to cause some pain, whether in the form of a higher unemployment rate or increased borrowing costs. A recession is also a distinct possibility, but Botkin believes it's a price that we might need to pay to tame inflation.
"If a recession is what it takes, then so be it," she said.