Confused by what is happening with interest rates? You’re not alone. When the New York Times asked economists what they thought, one said “a recession will happen.” Another was not so sure, saying, “The situation we are in is very different from normal.”
A lot of the concern stems from the upside-down relationship between short-term and long-term interest rates. The Federal Reserve has raised its short-term lending rate to banks multiple times in recent years, the last being in late July by one-quarter of a percentage point to a range of 5.25-5.5%.
That was bad news for borrowers whose loan rates can rise with yields on Treasury securities such as the 1-year T-bill or the 3-year T-note. Those are now higher than those on another closely watched index, the 10-year Treasury bond. That’s what economists and TV talking heads call an inverted yield curve.
Why does this matter, and what can you do about it? The last time short-term Treasury yields were about 1 percentage point higher than long-term ones was in 1980. Then, inflation was raging at over 14%. The Federal Reserve took decisive action, boosting its key rate to more than 17%.
Unemployment rose, and by July 1981 the U.S. was in a recession -- the most severe downturn since World War II. The resulting economic pain lasted 16 months, during which time the jobless rate peaked at 10.8%.
The U.S. economy is in better shape today than in 1980 in terms of unemployment, inflation and consumer spending. Still, the old saying, “Prepare for the worst and hope for the best,” applies. Here’s what you can do:
- Reduce your credit card balances, prioritizing those whose rates are tied to Treasuries or the prime rate. Consider consolidating your debts into an unsecured personal loan from Tropical Financial.
- If you’re buying a home, consider a fixed-rate mortgage. While 30-year loans have become more expensive, locking in a monthly payment will give you peace of mind. Should rates go down, you can always refinance.
- Update your budget. Tropical Financial has online tools and free financial coaches on its Financial Fitness With food and energy prices rising, you may be spending more than realized on necessities. Economize where possible, especially on discretionary items such as dining out and entertainment.
- Keep your money at a federally insured institution such as Tropical Financial. Investors are on edge. You won’t be if your savings and checking account balances are below coverage limits.
- Make sure you can weather inflation with this helpful article, or get through a financial setback with this article.
Tropical Financial has other resources, such as Get Beyond Money, your ticket to a secure financial future. Sign up today to get judgment-free financial guidance.