A local economist says inflation, affecting everything from groceries to...

A local economist says inflation, affecting everything from groceries to gasoline, would get even more out of control without the Fed interest rate hikes. Credit: EPA / Michael Reynolds

The Federal Reserve’s more aggressive steps to get inflation under control will create short-term challenges for Long Islanders and local businesses, but are necessary to avoid longer-term pain, local economic and financial experts said Wednesday.    

The Fed’s increase to its benchmark interest rate, and its plan to raise it several more times this year, will slow economic growth and inflation on Long Island as consumers reduce their spending, said John A. Rizzo, an economist and Stony Brook University professor. He said consumer spending represents about 70% of economic activity on the Island and nationwide.

“It’s going to cost more to buy a home, to use credit cards, to borrow money from a bank,” Rizzo said. “It’s going to be difficult for the consumer over the next year but if [interest rates] aren’t raised, inflation will get out of hand and lead to a long and deep recession.”

He continued, “It’s a ‘take your medicine now’ approach” or risk becoming seriously ill in the future. “For consumers, the next year is going to feel like things are getting worse, but if interest rate hikes weren’t applied, things would get much worse,” he said.

Small businesses in Nassau and Suffolk counties will be hit twice by rising interest rates: their costs will increase while sales fall because consumers will buy less, Rizzo said.

The Fed’s action will make it tougher for local businesses, most of which are small, to operate, said Matt Cohen, CEO and president of the Long Island Association business group.

“Rising interest rates will be yet one more hurdle for Long Island’s small businesses to jump over as it will impact the cost of loan capital, demand for their products, and cash flow,” he said on Wednesday. “This is on top of grappling with the perfect storm of record inflation, sky-high fuel costs and persistent supply chain delays, all of which makes it very difficult to be a small-business owner right now.”

The Fed raising its benchmark interest rate is an admission of sorts, said certified financial planner Mark Badami, who is president of the Financial Planning Association of Long Island.

“By them raising rates, it means, without admitting it, that the economy is out of control and they’re trying to slow down the economy,” said Badami, who is a financial planner in the Hauppauge office of MassMutual, which offers life insurance products, and retirement and investment services.

Consumers should hold off on making big purchases, such as cars, houses and major home repairs, for at least six months, if it would mean accepting losses on investments, he said. He advises consumers not to liquidate their investment portfolios to satisfy short-term needs.

“If the earmarked money was on the sideline, like their short-term money, then by all means make the purchases,” Badami said. “It seems that inflation is going to be here for a while, and if the thing that they were expecting to purchase is still available, may as well get it while you can.”

That’s one of the reasons that financial planners say it’s so important for consumers to have three “buckets of money,” Badami said.

There should be one for short-term use, with at least six months of quickly accessible cash for emergencies, he said. The intermediate source should be for three to five years of investment, he said. The long-term source is one that shouldn’t be touched for at least 10 years and that is invested more aggressively, he said.

Potential homebuyers also need to weigh the value of creating wealth through the purchase of a home against spending money on rent when deciding whether to postpone their search because of rising rates, said Steve Probst, branch manager at Fairway Independent Mortgage Corp. in Hauppauge. He noted mortgage rates were about 14% when he started his career in 1986. The average rate for a 30-year fixed home loan has averaged about 7.8% since 1971, according to data from mortgage giant Freddie Mac. Last month, that rate averaged 5.23%.

"People need housing and the fact of the matter is rents are skyrocketing as fast as home prices and interest rates," Probst said. "This is just one snapshot in time, and eventually it'll go the other way, and there'll be the opportunity to refinance into a more competitive rate." 

With James T. Madore and Tory N. Parrish

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