To keep inflation in check, interest rates may rise

The next move in interest rates is likely to be up, bringing some relief to long-suffering savers. But don't expect it to happen right away.

The Federal Reserve Board, which controls short-term rates, has been sending signals that it's worried about inflation, which is being fueled by higher food and energy prices. However, it doesn't want to make the faltering economy worse by raising rates too quickly.

Here's a look at what's going on with interest rates and what it means for consumers:

What do interest rates have to do with inflation?

Lower rates on mortgages, credit cards and car loans make it easier for people to borrow and spend. That creates demand for goods and services, which can drive up prices. Higher rates do the reverse.

Why did the Fed lower rates in the first place?

It wanted people to spend — just not too much. Rising unemployment and serious problems in the housing market have hit consumers in the pocketbook, which hurts the economy.

"The Fed spent the last nine months cutting interest rates and ushering homeowners with adjustable-rate mortgages to safety," said Greg McBride, senior financial analyst for Bankrate.com in North Palm Beach. "They are not going to want to throw them back under the bus by raising interest rates too much, too soon."

So where's the pressure coming from to raise rates?

A beaten-down dollar and sky-high oil prices, both of which would improve with higher rates. Last week Fed Chairman Ben Bernanke expressed concern that the dollar's fall is contributing to inflation, since it raises the prices of imported goods, including oil. Speculators and investors trying to hedge against inflation have driven the price of oil even higher.

"The Fed doesn't really have control of the exchange rate; that's the Treasury's jurisdiction," said Scott Brown, chief economist at Raymond James & Associates in St. Petersburg. "The message was for the markets that the Fed is watching the dollar."

When might the Fed actually do something?

"If the Fed had their druthers, they'd like to be able to sit on the sidelines for a while," McBride said. "Where it gets sticky is if inflation doesn't cooperate. Then the Fed is faced with the possibility of raising interest rates while the economy is weak and the housing market is still suffering."

He said it is unlikely the Fed would raise rates before the November election.

"If the economy starts to show signs of life, rates could start up early next year," Brown said.

What should an investor do?

Consider a bond or CD ladder. That means investing in bonds or CDs with different maturities so you'll regularly have money to reinvest if interest rates rise as expected.

"There are no magic investments out there," said financial adviser Greg Ghodsi of Raymond James & Associates in Tampa. "You have to really be careful about credit quality." It's easy to be seduced by higher yields on lower-quality bonds, but investors need to be aware of the risks, he said.

He recommends having no more than 5 percent of your money in any one bond issuer rated A or higher and no more than 2 percent in any issuer rated below A. "You have to stay disciplined," he said. "When you hit your limit, don't go over it."

Helen Huntley can be reached at hhuntley@sptimes.com or (727) 893-8230.