While it may not be a focal point in the day to day lives of most Americans, rising interest rates have a significant effect on all consumers. Taking a step back, you may be asking yourself why does the Federal Reserve adjusts interest rates? The Federal Reserve uses interest rates as a mechanism to stimulate or moderate growth. When the economy is booming, the Federal Reserve often raises interest rates to keep the economy and borrowing from becoming too hot. When the economy and consumers are struggling, the Federal Reserve will often lower interest rates to encourage borrowing and spending.
By most measures, the U.S. economy is and has been doing quite well for several years now. With steady growth in place, the Federal Reserve has gradually raised interest rates the last couple of years and has indicated that while it is data dependent, they are likely to continue. So, what do rising rates mean to you?
- First and foremost, the cost of borrowing will increase. The cost for consumers to borrow money for a home, car, credit cards, etc. increases. This could in effect reduce your purchasing power because more money will be allocated to interest.
- Rising rates often have a disproportionately negative impact on those who save very little and have large amounts of consumer debt which is a reminder of the need to reduce / eliminate consumer debt.
- On a positive note for savers, banks will likely gradually pass higher interest rates onto your bank deposits, meaning your bank savings and or checking account interest will increase. In addition, banks will likely increase the interest rates of bank savings products such as CD’s.
This is all part of a larger economic cycle and while it’s not in our control, it’s important to have a healthy understanding of what the Federal Reserve does and how it may impact you.