After 10 consecutive rate hikes since March 2022, the Fed has hinted that it will likely be putting the brakes on rate increases in the near future. So what should you — and what should you not — do with your money right now amid that news? Here’s what pros told us.
Do: Consider a CD
Many consumers have enjoyed the benefit of having their money in accounts paying high rates. Before those opportunities begin to shrink as rates peter off, now may be the time to be looking into CDs. If a CD fits your investment plan, plenty are paying 5% and higher. See some of the best CD rates you may get now here.
“There’s no advantage to waiting if you’re able to lock in now,” says Greg McBride, chief financial analyst at Bankrate, who adds that there won’t be fuel to drive CD yields higher and the risk is that yields on longer term maturities could begin to pull back.
“If you need your cash within 12 to 24 months, buying a CD right now would be smart. Just make sure it matures no later than when your cash needs to be ready and available to spend,” says certified financial planner Blaine Thiederman at Progress Wealth Management. See some of the best CD rates you may get now here.
Do: Put your savings in a high-yield savings account
Because most banks are still paying pennies on traditional savings accounts, certified financial planner Charles Thomas III at Intrepid Eagle Finance says you should look at high-yield savings accounts — some are paying 4% or more. See some of the best savings account rates you can get here.
“Savings accounts currently have flexibility, liquidity and higher rates, which could go away if rates were to drop, but there are no penalties for early withdrawal which gives you flexibility and liquidity,” says certified financial planner Mark Struthers at Sona Wealth Advisors.
Ken Tumin, founder of DepositAccounts.com says the average online savings account yield in May is 3.87%, which is much higher than the overall average savings account yield of 0.38%. “That’s a difference of about 3.5 percentage points and for a $10,000 balance, the difference would result in an extra $350 of interest in a year,” says Tumin.
But with inflation high, is this wise? To a point, yes, pros say. “Everyone needs an emergency account, why keep your savings in one that pays less,” says Thiederman. Pros say Americans need somewhere between 3-12 months of essential living expenses in their emergency savings fund. See some of the best savings account rates you can get here.
Do: Take a look at Treasuries
Another option to look into are individual US Treasuries. “You want to lock in these higher rates before they drop. Your money market or savings account rate could disappear overnight but with CDs or individual US Treasuries, you can lock in your rate if you hold them to maturity,” says Struthers.
We’re currently dealing with an inverted yield curve which means interest rates are higher in the short term and lower in the medium and long term. “This is highly unusual and likely will not last. It may be a good time to try and lock in these higher interest rates, of course, you need to assess your short-term needs and make sure these funds are not needed for the duration of the fixed income holding period,” says Peter Salkins, certified financial planner at Integrated Partners.
Do: Pay down your high-interest debt ASAP
Ultimately, even if the Fed is done raising rates, the cost of borrowing still remains high. “Credit card rates are over 20% and home equity lines of credit are the highest in more than 15 years, so paying down debt remains critically important. Utilize a 0% balance transfer offer to accelerate credit card debt repayment because paying down debt and boosting emergency savings will put you on firmer financial footing regardless of what happens in the economy in the months ahead,” says McBride.
See some of the best balance transfer credit card offers here.
Barring a financial crisis, Tumin says the Federal Reserve is unlikely to quickly lower rates. “Thus, consumers shouldn’t expect any quick reduction of interest rates on their credit cards and other variable-rate loans. Consequently, consumers should continue to prioritize the reduction of their debt that has high interest rates,” says Tumin. Moreover, rate hikes coming to an end should give consumers more confidence in making decisions. “We can all succeed in this new higher-rate normal if rates are stable. We might not have the growth we had when rates were 0%, but consumers and businesses can plan when rates are stable, especially if they’re coming down a little,” says Struthers.
Don’t: Assume the housing market will suddenly change
Mortgage rates remain heavily influenced by Fed rates, but they’re also affected by a number of other factors. “Lower inflation and a slowing economy are the prerequisites for lower mortgage rates,” says McBride.
Thiederman says buyers and sellers can expect home prices to stop dropping soon as real estate picks up. “It also means rates will likely start falling again mildly or at least stabilize,” says Thiederman. Still, with inflation near 5%, McBride says it has to start dropping faster before mortgage rates will see a meaningful and sustained decline. “If the economy slows significantly in the second half of the year and recession fears are validated, mortgage rates will fall even if the Fed doesn’t immediately cut rates,” says McBride. See some of the best mortgage rates you can get here.
If you’re buying a new home, be conservative with any assumptions and don’t assume rates will improve anytime soon. “The home loan market has accounted for all the Fed rate hikes in advance, because mortgages have fixed rates that are priced with a far longer timeframe in mind compared to other types of loans. If the Fed stops rate hikes, mortgage rates should also stabilize,” says WalletHub analyst Jill Gonzalez.
While you may be able to refinance for a lower rate at some point in the future, don’t depend on that happening immediately. “Just because rate increases stop or pause does not mean rates will go down anytime soon. The Fed could keep rates at the same levels for some time,” says Thomas. Struthers says the error for rates is on the downside, so if you’re considering buying a home, it might pay to wait. “Prices will often stabilize once people get used to the new lower rate. Trying to time affordability and the combination of rates and price can be difficult,” says Struthers.
While a lot of homeowners might be inclined to sell, many who refinanced in the last couple of years are now likely reluctant to give up their super low mortgage rates if it means having to take out a mortgage at a higher rate. “But if mortgage rates fall to 5.5% or lower, that might be low enough to motivate a lot of people to sell and move,” says Holden Lewis, home and mortgage expert at NerdWallet.
This article was originally published by Marketwatch.com. Read the original article here.