Rising interest rates can make it more challenging for Americans to buy a home, get a mortgage or pay off credit card debt. Typically, the Federal Reserve raises its key interest rate when inflation gets too high in an effort to prevent prices from increasing too rapidly.
Many consumers are used to borrowing at low costs and savings accounts paying next to nothing, but these days the Fed is raising interest rates on a regular basis – leading to higher borrowing costs. That makes it important for you to shop around for better-paying savings products like online savings accounts or consider using a balance transfer credit card as another way of reducing your interest payments.
The Fed has increased interest rates seven times this year, with further increases likely in the pipeline. The central bank is seeking to slow inflation that has surged above its target range in recent months.
But the Fed has also raised borrowing costs for consumers and companies alike, sending existing home sales down, driving up gas station prices, and raising concerns that higher interest rates could trigger a recession.
Inflation is one of the key influences on interest rates, so the Fed is actively working to contain it. But they must also monitor international developments that could affect debt prices in America.
China and Japan, for example, have collectively purchased only one percent of new government debt since 2011, reflecting their flight to safety. As a result, international demand for American debt has weakened, prompting the Fed to raise rates more aggressively in an effort to prevent higher inflation that could hurt the overall economy.
A rising federal funds rate can have a major impact on stocks, bond markets and interest-rate sensitive investments such as annuities. When interest rates are rising, investing in low-yield treasury or annuity becomes less appealing; instead investors will shift capital into equity and bond markets instead.
Stock prices can rise, providing investors with an opportunity to earn a higher return on their savings. This is particularly beneficial for savers who haven’t had access to high-yield savings products in recent years; now is their chance to lock in higher rates and potentially see greater returns from their money.
Rising interest rates can have a major impact on the performance of companies, particularly those based in the U.S. If a firm relies on foreign sources for its products, an increase in interest rates could reduce profitability as it decreases the value of dollar-denominated goods.
Interest rate increases can have a psychological effect on businesses and consumers alike. When interest rates rise, both groups may feel the urge to cut back on spending, leading to lower earnings and decreased stock prices as a result.
The Federal Reserve has not yet finished raising interest rates, meaning borrowing costs will continue to rise. Therefore, it’s essential to prepare for higher borrowing costs by managing your budget effectively. Aim to have housing expenses, savings and monthly debt obligations absorb about 30% of your total income – this is ideal for maintaining a healthy debt-to-income ratio.