The Federal Reserve has been raising interest rates since the first part of 2022 – in fact, they’ve raised them a whopping six times – and most experts believe the trend will continue. Rising interest rates can have both positive and negative impacts on individuals, businesses, and the economy as a whole. Thus, understanding how rising rates affect you is critical to making informed financial decisions.
Keep reading to learn more about the impact of rising rates and see how you can best navigate the changes we’re seeing.
Interest Rates and the Economy
Interest rates play a big part in borrowing and expenditure decisions by households and businesses.
A lower interest rate, for example, might encourage organizations to spend and expand while incentivizing people to borrow for the purchase of a new house, car, or to finance home improvement projects.
The Fed increases or decreases its benchmark rate to keep inflation under control and promote sustainable economic growth. By raising the interest rate, the Federal Reserve hopes it can slow down the economy, fighting inflation and eventually driving prices down.
What Do Interest Rate Hikes Mean for You
For borrowers, rising interest rates mean that loans will become more expensive. Lenders pass on increased costs to consumers through higher loan payments or fees associated with taking out a loan.
On the other hand, savers benefit from higher interest rates because banks offer better returns on savings accounts.
Pros of Rising Interest Rates
- Lead to greater stability in markets and economies
- Discourage excessive risk-taking by investors who otherwise might take on too much debt when borrowing is cheap
- Higher returns offered by banks can incentivize saving
- Less spending can stabilize markets and keep inflation under control
Cons of Rising Interest Rates
- Decreased consumer spending power
- Negative impacts across industries – like retail – where sales may suffer
- Consumers are unwilling/unable to spend money due to high-cost credit products
- Discourages businesses looking to finance operations through loans
Rate Hikes 2022 – How High Will Rates Go?
It’s difficult to say exactly when the feds will raise interest rates again, or predict how high they might go. Throughout the last year, economists generally agreed that more hikes were coming. They also haven’t ruled out additional ones next year, depending on the state of global affairs.
Predictions are primarily based on current US economic trends and projections made from various sources. For example, the IMF World Economic Outlook report (released in April 2022) suggests steady GDP growth throughout next year despite ongoing pandemic-related challenges. Thus far, the following rate hikes 2022 have been observed:
Fed Funds Rate
.25% – .50%
.75% – 1.00%
1.5% – 1.75%
2.25% – 2.5%
3.00% – 3.25%
3.75% – 4.00%
4.25% – 4.50%
*Source: Forbes Advisor
Types of Rates
There are two main types of interest rates: short-term and long-term. Short-term vs long-term rates are offered on different products and can significantly influence the total amount it costs to borrow.
Short-term rates refer to the rate of return on investments with a shorter maturity period, usually one year or less.
Long-term rates refer to the return on investments with a maturity period longer than one year.
Check out our current rates page on Island Federal today.
Short-term rates tend to be more volatile than long-term ones as they react quickly to changes in economic conditions such as inflation or deflation.
- Savings accounts/CDs: Short-term investments offered by banks, credit unions, and other financial institutions. Typically offer higher interest rates than checking accounts but may require a minimum balance be maintained to earn the advertised rate.
- Home equity lines of credit (HELOC): HELOCs allow homeowners to borrow against the equity they’ve built up in their homes. They usually come with variable interest rates that fluctuate with market conditions. The amount borrowed is repaid over time, along with any applicable interest charges.
- Adjustable-rate loans: Considered short-term loans and generally have terms ranging from one year up to five years or more, depending on the lender’s requirements. They often start at a lower rate than fixed-rate loans. Still, they can increase significantly after the initial period ends due to changes in market conditions or other factors determined by the lender.
- Credit card rates: Can vary significantly depending on various factors, including credit score, the type of card selected, and any promotional offers available from different issuers. Typically, most cards have an APR between 10% and 25% (or higher).
Long-term rates are an important factor to consider. They refer to the interest rate charged on loans and investments over extended periods, usually five years or more.
- Mortgage rates: A long-term rate that determines how much you pay for your home loan each month. They’re important when shopping for a mortgage because the higher the mortgage rate, the more expensive your monthly payments will be.
Check out our Mortgage page today.
- Auto loans: Come with long-term interest rates, which vary depending on factors such as credit score and down payment amount.
- Student loans: Typically come with fixed long-term interest rates that remain constant throughout the life of the loan regardless of market conditions or other external factors.
- Bonds (Corporate, Municipal, State): Corporate, municipal, and state bonds carry different types of long-term interest based on their respective risk levels. Corporate bonds are generally considered riskier than municipal or state ones due to the lack of government backing or guarantee against default. It’s worth noting that this can ultimately result in higher returns but also comes with greater risk.
Interest rates have a significant impact on the economy. Especially today, rising rates are a reality we must face. Understanding the implications of rate hikes and how they can affect your finances is essential. While some pros are associated with higher rates, such as increased savings yields, there are also cons, like higher loan payments
Are you feeling the pinch of rising interest rates? Island Federal Credit Union is here to help. We offer competitive rates and a variety of loan and financing options to fit your needs. Our knowledgeable staff can help you find the best solution for your financial situation. So don’t let rising interest rates keep you from achieving your goals – Contact Island Federal today to see how we can help!