Fed Raising Interest Rates
Aiden Pisarczyk for SWM | 05/05/22 (edited 08/05/22)
Let’s start by defining what this actually means – essentially, the Fed increases the interest on overnight loans that banks make in order to satisfy people’s deposits and withdrawals; therefore, the cost of credit becomes more expensive, as local and big banks are having to pay more to borrow from bigger banks like the Fed. In turn, loans of all kinds tend to become more expensive, bringing inflation down and causing money, essentially, to become more valuable. The goal is to increase the COC (Cost of Credit)
Forbes explains it like this – “Those who can’t or don’t want to afford the higher payments postpone projects that involve financing. It simultaneously encourages people to save money to earn higher interest payments. This reduces the supply of money in circulation, which tends to lower inflation and moderate economic activity—a.k.a. cool off the economy.”
How Does This Affect Different Areas?
- The higher interest rates usually have a negative impact on the stock market, as raising rates makes the cost of doing business higher, almost in all spheres, causing public companies to earn lower revenues and affecting their stock values.
- The “psychology” of the market is also a big factor, as traders get cold feet easily when rates are announced to go up. They may sell off their shares quickly and cause a drop in market value.
- Your borrowing rates are bound to go up. Most credit card rates aren’t fixed, so you’ll probably find yourself paying more when it comes to your card. Paying off your credit card debt is always a good idea, and even more in a time like this.
- Personal loans and Auto Loans will also rise most likely, along with basically every type of money borrowing.
- When you’re holding money in interest-returning accounts such as 401k’s and Roth IRA’s, Federal Interest rates going up will be your friend. The competition between banks and credit unions because of a hike like this will most likely stimulate growth in your personal account. (NerdWallet)
- Unfortunately, rising interest rates can have distinct impacts on mortgages and loan rates.
- There are a few factors involved, but no definitive statement can be made. Usually, the mortgage rates follow interest rates, but that’s not always the case.
- The most common circumstance for mortgage rates to follow climbing interest rates is when the housing supply becomes too low – rate makers increase the rate to bring down some of the demand. This can help buyers, giving them lower buy rates, but can hurt sellers as they must lower their price to match the demand.