At its last meeting the Federal Reserve declined to cut short term interest rates any further. With rates currently at 2% there isn't much room to go lower, and inflation is a concern according to many economists. How should Americans react to this latest development?

Mortgage Rates: What Did You Expect?

What the Fed did (or in this case didn't do) is old news in the financial world. Investors' expectations of what will happen in the future drive financial markets and interest rates.

For example, recent statements from Fed Chairman Ben Bernanke indicated that inflation was a concern and led to speculation that rates would be increased at the next meeting. Investors reacting to these expectations pushed up long-term mortgage interest rates in anticipation of an increase.

When rates were held steady, the market reacted by dropping long-term rates slightly. Changes based on expectations move interest rates up and down all day long. But one trend most agree on is that in the long run rates will likely increase.

Considering a Mortgage Refinance? Don't Wait

If you plan to remain in your home for some time and have an adjustable rate mortgage, it's probably time to lock in a fixed rate. Looking at historical mortgage interest rates, one can see that while there is plenty of room for increases, rates have seldom been lower than they are now. Getting a low fixed rate while you can is almost a no-brainer when you consider that the economy is so uncertain. Why not make one thing in your financial future a sure thing?

Consumer Debt Is a Time Bomb

Credit card debt can blow up in your face in an inflationary environment. Even fixed-rate cards are no safety net because credit card companies can generally raise your "fixed rate." Check the fine print on your agreement and you will probably see many provisions for rate increases. Your best bet is, of course, to pay down your balances as quickly as possible, starting with the card with the highest rate and working your way down to the one with the lowest. Those with home equity may want to use it to pay off credit card debt and replace unsafe variable interest rates with a lower fixed rate. This can be done with a cash-out refinance or a fixed rate home equity loan.

Invest Safely, But Wisely

Yes, CDs are considered safe. But is an investment that pays less than the rate of inflation (in other words, a sure loser) a safe bet? If you want CDs regardless, don't make the mistake of locking yourself in for the long term. In the early 1980s CD investors were able to get double-digit returns when inflation was at its worst. How would you like to be locked in at 3% in that environment? CD investors should be looking for liquid, short-term options (6 month certificates) or pursue a strategy of "laddering" their investments. "Laddering" CDs involves purchasing several CDs at varying maturities -- for example, if you have $25,000 don't invest it all in a 5 year CD. By investing $5,000 each in 1,2,3,4, and 5 year CDs, you have increased both your liquidity (ability to take out money without penalty) and your return (in inflationary periods you'll be able to take advantage of higher rates in as little as 12 months when the first CD matures).

While it appears that the U.S. may be in for a rough economic ride over the next few years, there are things you can do to protect yourself from the worst and take advantage of the best of what's coming. A little advance planning can go a long way toward assuring your financial safety in the years ahead.