MONEY MATTERS

money matters BY CAROL LEONETTI DANNHAUSER

FED UP UNPACKING INFLATION, FROM POLICY TO POCKETBOOK

Scott Bogan

As scientific minds wrestled with keeping people safe during Covid-19, the quarantine threatened to take down the economy. In Fairfield County and beyond, businesses closed, events were canceled and people stopped commuting to the office. Close to 10 million people lost jobs nationwide, according to the Bureau of Labor Statistics. Fearing sinking corporate profits, investors unloaded stocks and, over a series of weeks, the market plunged by nearly a third. zero. Consumers benefited, from lower rates on mortgages, car loans and credit cards, increasing buying power. “If your mortgage is 5 percent versus 2.5 percent, you can borrow a lot more at 2.5 percent. It trickles through,” Bogan says.

Massive government stimulus programs infused households with free money. A booming economy and record low unemployment followed. Costs for goods and services crept up to 7.5 percent at the end of January 2022, the highest increase in forty years. Food costs are 7 percent more now than last year. Electricity is up more than 10 percent. Before the invasion of Ukraine, gasoline prices had soared 40 percent higher than 2021, according to the Consumer Price Index; the invasion led to an even greater surge.

Early this year, the Fed turned on its heel. Enter quantitative tightening. The Fed plans to raise interest rates to cool the hot economy. It won’t be reinvesting those interest payments from banks. “They’re going to take that money and go to a giant furnace and incinerate it,” Bogan reports.

All the while, the Federal Reserve System worked feverishly to save the monetary system. The Fed stormed to the rescue, literally printing money, supplying banks with cash and buying massive amounts of government and corporate debt. The goals: to maximize employment and to keep prices as stable as possible. In other words, “massive quantitative easing,” says Scott Bogan of Wilton, a wealth adviser and capital markets strategist with GYL Financial Synergies in Westport. Part psychologist, part educator, part seer, part market strategist, he helps the investment advisory firm unpack how the Fed’s movements affect clients’ pocketbooks.

His advice: Take a few moments now to understand how the Fed’s actions affect you. The Fed, which is nonpartisan and operates independent of Congress, is the central bank for the United States. “Interest rates are a tool they can use to stimulate activity in the economy,” Bogan says. During the pandemic, the Fed slashed the interest rate that banks pay to borrow from one another to near

Less cash translates to costlier loans and fewer purchases. Expect car loans, mortgages and the like to be cheaper now than in months ahead. Higher interest rates make the dollar worth less abroad as well; international trips and purchases will cost more later in the year.

Bonds, stocks and real estate all behave differently when interest rates increase. Bonds are supposed to be the safety net in a portfolio, helping to keep that nest egg from cracking. But rising interest rates cause bond yields to go up— and values to fall—in the short term. “Expect a hit to your bond portfolio,” Bogan says.

Alternatively, “real estate in a high inflationary period has been a good place to go. Lease agreements typically have built-in rent escalation clauses. They help real-estate landlords hedge their revenue streams,” says Bogan.

As for the stock market, expect volatility, “causing the stock market to reprice,” Bogan says. Talk to your adviser about the risks and the timeline in your portfolio, so that as the Fed works to steady the monetary system, you’re prepared.

TAKE IT TO THE BANK CDs make a comeback

While inflation and invasions seesaw the market, one stalwart is returning with a new luster: the good old certificate of deposit. Each time the Fed hikes interest rates, bank rates “will start to rise and cash will generate a return,” Bogan says. If you want to stash your cash in the short term, consider laddering some CDs. Stagger maturity rates, from one to four years, maybe, then as soon as one matures a year down the road, you can reinvest it—or weigh your options in what will hopefully be a more stable environment.