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Fed's inflation-fighting measures bring pain for borrowers, gain for savers

WRAL News spoke with two financial planners on Friday to discuss how to prepare for the pain ahead.
Posted 2022-08-26T19:42:04+00:00 - Updated 2022-08-26T21:42:08+00:00
Financial advisors warn against adding debt as interest rate hikes loom

Rising interest rates mean it will cost more to borrow money whether you're in the market for a new car, buying a home or swiping your credit card at the store.

WRAL News spoke with two financial planners on Friday to discuss how to prepare for the pain ahead.

“Interest rates go up, and that’s the pain,” said Raleigh-based financial planner Gerald Townsend, who helps families plan their financial futures at Townsend Asset Management.

The Federal Reserve’s attack on inflation by raising interest rates will make it more expensive to borrow money. However, the higher rates will help people who put money into interest-earning savings.

Since March, the Fed has implemented its fastest pace of rate increases in decades to try to curb inflation. The central bank has lifted its benchmark rate by 2 full percentage points in just four meetings, to a range of 2.25% to 2.5%.

The hikes have led to higher costs for mortgages, car loans and other consumer and business borrowing. Home sales have been plunging since the Fed first signaled it would raise borrowing costs.

In June, the Fed's policymakers signaled that they expected their key rate to end 2022 in a range of 3.25% to 3.5% and then to rise further next year to between 3.75% and 4%. If rates reached their projected level at the end of this year, they would be at the highest point since 2008.

"They’re trying to slow spending," Townsend said of the Fed. "Well, let’s get ahead of the curve. Let’s slow down our personal spending."

“This is not an environment that you want to load up on debt,” Townsend said.

Townsend offered the following advice.

“If they really slow down growth and unemployment rises, you’re going to need that cash,” Townsend said. “Now’s the time to build up that cash a little bit.”

Raleigh-based financial planner Ben Micham asks his clients who have debt the following question: “Are we able to deduct it on your tax return or not?”

Micham said credit card debt is not deductible, but mortgage interest might be.

“If you get a 5% mortgage and you’re able to deduct the mortgage interest, then you’re really only paying 3.5% or 4%,” Micham said. “Knowing whether you’re getting a deduction for your mortgage or not at least helps you understand what it’s really costing you.”

When it comes to your investments in the stock market, Townsend told WRAL News to look at companies that can pass on costs to consumers.

Townsend said companies that are locked in on prices will feel the pinch the most from rising inflation and interest rates.

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