For the first time in three years, the Federal Reserve raised interest rates this month. The .25% increase—announced at the September FOMC meeting—ended a nine-month pause and was the first hike since July 2023.
Persistent inflation was the primary driver of a rate hike. American households’ purchasing power has been under pressure for some time now, and energy prices have pushed headline inflation higher. With relatively low unemployment, modest job growth, and positive (but slow) GDP growth, policymakers still anticipate expansion rather than a downturn over the course of 2026, and an additional rate hike is likely before year-end.
Despite a generally positive economic outlook, it’s wise to proceed with caution. The impacts of high inflation and concern about a growing national deficit are prompting important conversations about risk reduction.
When financial uncertainty feels high and the economy is outside of your control, here are four things you can review to lessen its effects on your financial situation.
- Asset allocation. Investments should be placed in a combination of tax-deferred and taxable accounts to optimize the taxes you owe each year. Typically, investments that fluctuate—such as individual stocks and ETFs—belong in taxable accounts. Although taxable accounts are subject to tax on interest, dividends, and capital gains, it’s possible to harvest losses to offset capital gains, especially during times of market volatility. Asset allocation and tax-loss harvesting allow you to take advantage of downturns and reduce your overall tax liability.
- Diversification. Avoiding over-exposure to a single asset or sector is critical when the economy is uncertain. As I wrote in an article for Forbes.com earlier this year, certain sectors are considered essential—or ‘inelastic’—because consumers will need them, regardless of price increases. Other sectors are highly sensitive to current prices, and their popularity—or ‘elastic demand’—fluctuates when money is tight for consumers. When economic growth is modest or slowed, investors can limit their exposure to 'optional' goods and services. Proper diversification doesn’t eliminate the risk of investing nor guarantee profits, but it can reduce the effects of one bad investment or hard-hit sector.
- Emergency savings. Although inflation might increase your monthly expenses, don’t deplete emergency funds to cover higher bills at the gas pump or grocery check-out line. Instead, adjust your pre-inflation budget to reflect today’s reality, and trim expenses where you can for the short-term. Economic uncertainty and high inflation might lead you to want more cash on hand, but keep in mind that your cash savings can’t keep up with rising costs. Long-term financial plans often have higher success rates when assets remain invested to keep pace with inflation.
- Debt management. Avoid taking on additional debt to cover higher costs, but don't rush to pay off low-interest loans—such as your mortgage—just to eliminate debt altogether. As always, pay off high-interest or variable-rate liabilities as quickly as possible, but otherwise, leverage your appropriate debt to strengthen cash flow as you weather inflation.
The saying “Ignorance is bliss” is not the best way to navigate economic uncertainty, especially when it comes to your finances. Use this time to review your investment portfolio and financial plan and make adjustments that help preserve your short-term cash flow without compromising your long-term success.