Four takeaways after Fed rate pause

THE COLOR OF MONEY

There's a horror movie cliché that feels a lot like the Federal Reserve's recent interest rate pause.

You know how it goes. Near the end of the film, there's a moment of relief when the villain has been taken out, usually in some gruesome way.

But then the menacing music starts. You jump after realizing the killer is supernaturally still alive, indicating there's more peril to come.

That's the storyline we're living with the Fed's relentless push to beat down inflation.

The Fed left interest rates unchanged last week but signaled that inflation is still a scary figure in our economy. And it suggested the rate pause may be short-lived.

"The process of getting inflation down is going to be a gradual one," Fed Chair Jerome H. Powell said during a news conference Wednesday. "It's going to take some time."

So what does this mean for your finances?

I had a conversation with Frank Lietke, executive director and president at Ally Invest Securities, about what's next in this horror show, which has made it more expensive to buy a home, to purchase a used or new vehicle, and to pay down debt.

Here are four takeaways from the Fed's recent rate decision.

Consumer prices are still stubbornly high

Powell said the Fed is "acutely aware that high inflation imposes hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing and transportation."

A year ago, the consumer price index hit a 40-year high of 9.1% on a year-over-year basis. Since then, amid 10 consecutive Fed rate hikes, the inflation rate has been moving down.

Prices rose 4% year-over-year in May, according to the U.S. Bureau of Labor Statistics.

The Fed wants to return inflation to 2%.

Don't view the Fed pause as a sign that we are out of the rising-rates woods just yet, Lietke said. The drop in inflation since last year may feel like we're getting relief, but many consumer goods and services are still painfully high, he pointed out.

The cost of used cars and trucks climbed 4.4%. Motor vehicle insurance was up 2%. Apparel and personal care goods also saw increases in May.

"Price stability is the responsibility of the Federal Reserve," Powell said. "Without price stability, the economy doesn't work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all."

Prepare for more rate hikes

Here's where the chilling music starts.

"Some further rate increases will be appropriate this year," Powell said.

There could be a rate hike as soon as July, Lietke said.

"I think the Fed realizes there's probably going to need to be more tightening or raising in rates absent some other massive economic event to get that inflation number under control," he said. "We see it persisting now for a longer period of time into 2023. As long as that number is still at that higher level, I think the Fed is going to be pushed and really nudged to continue to raise rates."

Buy now, not later

If higher rates are coming, this means higher borrowing costs on big-ticket items.

From buying a home to a new car, locking in a fixed interest rate now before rates rise again could save you money in the long run. The average rate on a 30-year mortgage stood at 6.69% as of Thursday, according to Freddie Mac. A year ago, the rate was 5.78%. But for the same period in 2021, the 30-year fixed rate was 2.93.

"Housing has corrected a bit, but I think that if somebody is waiting for a 2-to-3% mortgage rate, again, I don't see that happening in the near future," Lietke said. "Given where rates are expected to go in July, they could go up again."

Before making a major purchase, consider your personal financial situation.

"If you find your dream house and it fits into your budget and it's good for you or your family, don't let perfect be the enemy of the good," Lietke said.

If mortgage rates fall, you have the option to refinance. The same is true if you need to purchase a vehicle.

And if you can afford it, splurge. Don't let your frugality and your worries about money rob you of paying for some wants.

"Make trade-offs and sacrifices, because the minute you eliminate wants, people can feel a sense of misery," Lietke said.

Stick to savings

Things are getting better, but you may need to pull back on unnecessary purchases.

In this inflationary environment, reconsider how you allocate your income.

With the increase in the cost of goods and services, more of your money is going to pay for necessities. As a result, you might be considering reducing or even cutting out saving for retirement or building an emergency fund.

"The last thing you want to do for your long-term plan is to eliminate savings," Lietke said.

If you can, don't let the higher expenses derail your savings goals.

Understandably, if you're living paycheck to paycheck, there may not be anything extra to save. But you can plan for a time when your financial situation improves.

Ask yourself: Where do you want to be in one, three and five years?

Then make a plan that might include boosting your job skills or increasing your income. Or set a goal to save even a small amount of money every month, Lietke suggests.

"Little wins have a super motivating effect on people," he said. "It's about setting up that plan."

Michelle Singletary is a personal finance columnist for The Washington Post. Her column runs on Sunday.