Interest rates are rising: How to prepare

Most economists expect the Fed to raise rates four times this year

The Federal Reserve signaled Wednesday that it could raise interest rates as early as March for the first time in three years as the U.S. battles the highest inflation the country has seen in nearly four decades.

The central bank said in a post-meeting statement, "With inflation well above 2% and a strong labor market, the committee expects it will soon be appropriate to raise the target range for the federal funds rate."

Most economists expect the Fed to raise rates four times this year, with some analysts projecting even more increases. While the moves might be subtle, the forthcoming increases can impact your personal finances in a variety of ways.

"Interest rates are set to increase in nearly every category from mortgages, to credit cards, to savings accounts — just some more than others," Certified Financial Planner Danielle Harrison, founder of Harrison Financial Planning in Columbia, Missouri, told FOX Business.

credit cards

Paying down credit card debt is always a good idea but should be an even greater priority with interest rates set to rise.  (iStock / iStock)

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"Thirty-year mortgage rates are expected anywhere from mid-3s to low 4s versus the sub-3% rates we saw in 2021," Harrison explained. "As rates rise, it is good to reevaluate paying down any liabilities, particularly those with variable interest rates such as credit card and [Home Equity Line of Credit] debt."

CFP Marguerita Cheng, a CFP Board Ambassador, agrees, telling FOX Business, "If you have a home equity line of credit (HELOC) – the interest rate is not fixed. It is important to know that your payment can increase when interest rates rise. Consider contacting your lender for options for a fixed rate."

One thing that could be seen as a plus for savers is that they will earn more on their cash deposits, but with inflation surging, it might not be the benefit some would otherwise expect.

A customer uses an automated teller machine (ATM) at a Bank of America bank branch in San Francisco, on Monday, July 12, 2021.

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"It'll adversely affect older people as they won't be able to get anywhere near the rate of inflation on their savings accounts," Peter Morici, an economist and professor at the University of Maryland, told FOX Business. "Interest rates may be higher, but inflation will rise."

"Savings accounts and CDs should also see increases, but will do so at a slower pace," Harrison said. "As banks raise the rates they lend at, they will want to make up for the compressed margins they have faced over the last several years due to the low interest rate environment."

Harrison adds, "For savers, be wary of locking up your money in low-rate CDs in a rising rate environment."

The experts we spoke with said there are also a number of things investors can do to prepare for interest rates rising.

a photo illustration of cash and someone using a graph on a tablet

Investors might want to consider making adjustments to their portfolios with interest rates set to rise. (iStock)

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"Consider reevaluating your investment portfolio," Cheng said. "Bonds, bond mutual funds and bond ETFs can be sensitive to changes in interest rates."

According to Morici, "Cash you don't need right away should be in an index fund like the S&P 500, because the reality is companies can raise their prices – and the big companies more than the small companies." He added, "I expect market valuations to follow inflation up."

FOX Business' Megan Henney contributed to this report