Experts: Battling inflation a gradual process
While Wednesday’s increase to the interest rate by the Federal Reserve was the second to happen within a month and a half, the impact to consumers is still relatively negligible, according to a local financial adviser.
Howie Pentony, founder and owner of Pentony Capital Management in Portersville, said the Fed’s bump of 75 basis points brings the interest rate to a range of 2.25 to 2.5%, in an effort to curb inflation.
When banks’ borrowing rates are higher, that typically discourages consumers from taking out loans or charging purchases to credit cards, helping to slow inflation, according to Pentony.
“Banks make more money when interest rates are higher; you and I pay more to borrow money,” Pentony said. “If (the Fed) thinks things need shut down quickly, they raise interest quickly. It's not necessarily a bad thing, as long as they don't get too high.”
The Fed last bumped the rate in June, also by three-quarters of a percentage point, which was the biggest increase since the mid-1990s.
Although the increases are atypical for the Fed, Pentony said he is skeptical that the move will work to slow inflation, especially seeing that property prices are still relatively high.
“Housing prices are still high, costs are still high,” Pentony said. “I haven't seen prices coming down, even though interest rates are going up.”
Wendy Bennett, senior financial adviser at Bennett Associates Wealth Management, said the interest rate hike may work to slow inflation incrementally.
“I don’t think the inflation rate will climb as rapidly given the attempts by the Fed to slow down consumer spending by increasing interest rates,” Bennett said. “They will need to continue increasing rates, although likely at a slower pace, until it appears that the current supply (and) demand imbalance has been addressed and the inflation rate is closer to their 2% target.”
Bennett said the impact on consumers will depend on their position in the market, and what they are looking to purchase or invest in.
“For those who are borrowers, it could mean higher rates for debt such as credit cards or new mortgage loans,“ Bennett said. ”For those who are savers, it could mean higher rates on savings, such as CDs which have already begun to offer higher interest rates.
“In addition to curbing spending and/or delaying big ticket purchases ... this is a good time to avoid liquidating investments if possible.”
People looking for safe investments to now can buy I-Bonds, the “I” stands for inflation, which Bennett said are designed to protect the value of your money from inflation. Bennett said the interest rate on I-Bonds is correlated directly with inflation.
While there are some options for investing during times of high inflation, Bennett said investors may want to just wait a little longer to get the most bang for their currently-less-valuable buck.
“If you’re an investor, you need to stick to a long-term investment strategy and avoid emotional reactions to market retractions and inflationary pressures,” Bennett said. “Allow time for market recovery instead of selling out of investments.”
Pentony said he has not seen the higher interest rate have widespread negative affects on the economy, but if it is bumped again in the near future, he may raise an eyebrow.
“So far it's no big deal,” Pentony said. “If they keep it up it's going to really hurt.”
