What to do with your money when the Fed hikes interest rates

In the latest issue of Personal Finance Insider: The Fed just hiked interest rates again to slow down the economy. Financial planners share advice.

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Here's what: Now is a good time save and invest strategically

The Federal Reserve hiked interest rates once again this week, by 0.75 percentage points. The goal is to cool the economy and bring high inflation under control, but repeated hikes will "bring some pain" to families and businesses in the short term, as Fed Chair Jerome Powell put it.

If you've been shopping for a home or looking to borrow money for your business recently, you're undoubtedly keenly aware of that "pain." Just this month, mortgage rates leapt up to 6% for the first time since 2008, an astronomical rise from their early pandemic-era lows in the 2% range.

And while inflation is likely eating away at every extra dollar in your budget, there are some smart things you can do with your money right now to help it grow while interest rates remain high.

Switch to a high-yield savings account

If you have savings sitting in a typical bank savings account (currently earning an average of 0.17%) run, don't walk, to open a high-yield savings account. Many HYSAs are currently offering 2% or more. Make sure you choose an FDIC-insured account.

Buy I bonds and short-term bonds

The "I" in Series I savings bonds stands for inflation — meaning the rate offered by these bonds is tied to the rate of inflation (which as we all know is currently sky high). At present, Series I Bonds are paying 9.62%, and individuals can buy up to $10,000 worth annually.

"If you have cash that you are certain you won't need for 12 months, consider purchasing Series I Bonds," says financial planner Natalie Taylor. "Rates reset every six months, but if inflation and interest rates continue to be high, Series I Bonds will continue to pay very attractive interest."

Brian Mattox, vice president and chief investment officer at Kendall Capital, adds that buying shorter-term bonds is lucrative right now. "Shorter-term (two-year) treasuries are paying just as much or more than 10-year or even 30-year treasuries," he says. Plus, "Short-term debt instruments can be reinvested after maturity to earn even higher rates during a rapidly rising rate environment."

Avoid variable-rate debt

If you have to make a large purchase right now, try to avoid using variable-rate debt to do it. For example, says Taylor, if you're buying a home, try to lock in a fixed-rate mortgage — you can always refinance down the road if rates drop again.

"The benefit of a fixed-rate mortgage is that your interest rate will never change, but with an adjustable-rate mortgage, your interest rate can increase if interest rates continue to rise," she says.

Now is also a good time to consider balance-transfer offers on your credit cards, since your monthly interest rate may change as the Fed raises rates.

"If you are carrying a high balance on your credit card, consider transferring the balance to a zero-rate balance transfer card that locks in a zero rate for a temporary period," says financial planner Jovan Johnson.

Stick to your long-term investment plan

If you'd prefer to do absolutely nothing right now because thinking about money is so overwhelming, that's fine. In fact, it's the best thing you can do with your investments, especially your retirement savings.

"Stay true to your long-term investment plan," says Mattox. "Don't let the Fed's interest rate movements and subsequent equity market volatility scare you into any rash, large-scale portfolio allocation changes."  

— Stephanie Hallett, senior editor of Personal Finance Insider

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