Upside Down

May 09, 2022

Last week we received the Federal Reserve’s May interest rate decision, which was another 50 basis points (half a percentage point) increase. Of course, rising interest rates mean borrowing costs more, and eventually, savings will earn more. We all want to be on the right side of this equation.

The average interest rate for a 30-year mortgage has already moved above 5.5%. It appears that something close to 6% by the end of the year may be possible. When compared with where average rates were a few months ago (3.25%), a homeowner can now expect to almost double the interest they will pay on a $500k loan. Now is the time to take a second look at your variable rate credit cards, HELOCs (home equity lines of credit), ARMs (adjustable-rate mortgages), and anything else you have that is tied to rising interest rates. The banks and credit card companies won’t waste any time adjusting your rates up.

Inflation rages on and we may be a long way away from stabilization. New CPI figures are set to land on Wednesday of this week, but predictions suggest a number slightly lower than last’s months 8.5%. I can’t imagine it will be much lower given the inflationary challenges the world seems to encounter daily. The war in Ukraine continues. Yesterday, the Group of Seven (G7) countries pledged to ban all Russian oil and gas, which is possibly very bad news for the EU, given that parts of Europe are heavily dependent on these resources. China’s leader Xi Jinping continues to tighten lockdown measures to fulfill their zero-Covid mission. Supply chain disruptions continue to create inventory shortages. All coupled with the velocity of rate hikes in the US which have pushed up treasury yields and the dollar, putting even more pressure on the rest of the world.  

The bright side, of course, is possibly higher yields on your cash. Money saved for the short-term, or for emergency fund purposes, has experienced a long hard road of extremely low yields, which have left people looking for creative solutions. We spoke about Series I Bonds a few weeks back, which are now yielding a whopping 9.62%. You can buy them at that rate until October 2022. Even though you can only buy $10,000 a year, it is one small way you can fight negative real rates of return. Another tip is to use money market or other short-term securities, like treasury bills, which are now earning higher rates than we’ve seen in several years.

The world seems to be on a bit of a roller coaster right now and watching the news can be a scary undertaking. I’ve needed to remind myself of this recently, so I will remind all of you as well. Take care of your wellness just as you would your financial health. Even the small things, like getting outside for a walk and some sunshine, can be a tremendous help.

Whitney Butler