There has been a lot of interest lately in interest rates. For good reason. After years of being somewhat forgotten, interest rates are making a comeback. If interest rates were an actor, it would be Brendan Fraser.
Well, that’s not entirely true. People seem to like Brendan Fraser a lot. Most people are not a fan of high interest rates.
As you’ve likely heard, the Federal Reserve just raised interest rates once again, a quarter of a point, despite a lot of talk that maybe this time it won’t be because of the recent Silicon Valley bank debacle. So what do higher interest rates mean to you?
said Stephen Henn, assistant professor of economics at the University of Michigan Sacred Heart University in Fairfield, Connecticut. “when The Fed raises interest rates to combat inflation, and tries to slow consumer spending and cool the economy. This affects everyone.”
He has a point. Let’s take a look at some of the ways recent interest rate increases can affect your life.
1. Higher interest rates will affect your savings account.
We’ll start here because that’s where everyone is In reality Would love to see higher interest rates. It seems that people rate high interest savings accounts almost as much as they rate puppies and ice cream cones.
“Depending on the institution, savers can find interest rates between 3.0% and 4.5% on their short-term savings or CDs, which is a significant increase compared to the low rates of the past few years,” said Eric McCallie, 24, MD, MD, 24. years of working in investment management and is now assistant professor of finance at Quinnipiac University in Hamden, Connecticut.
Of course, if you’re thinking, “Wait, my bank still offers something less than 1%,” McCalley says that’s because many banks — the biggest ones — don’t have a lot of incentive to offer generous interest rates.
“These large banks with large investment banking operations have excess deposits in their banks from government operations and an increased savings rate during the pandemic,” McAley said.
In other words, the big banks will do just fine with or without your savings. But many smaller banks, online banks, and credit unions want to remain competitive with traditional brick-and-mortar banks, so they tend to offer more generous interest rates.
2. High interest rates will affect your investments.
Higher interest rates will help your savings account, but probably not all places you invest your money.
People who own stocks or bonds may see the value of those assets depreciate. Dave Jolly, a Economics professor at Bentley University in Waltham, Massachusetts. On the upsideAnd Savers who invest in CDs or Treasury bonds see much higher payouts. New buyers of bonds will see higher returns due to lower bond prices. Therefore, there are opportunities to benefit from higher rates.”
Unfortunately, since inflation has been high, you may feel like you don’t exactly have any extra cash to dip into a high-yield savings account or CD, also known as a certificate of deposit.
In fact, interest rates and their effect on savings accounts and investments often lead to inequality in wages, according to Ahmed El-Rahman, assistant professor of economics at the University of Cairo Lehigh University In Bethlehem, Pennsylvania.
“In general, interest rate increases will help savers, who tend to be older and wealthier, and hurt borrowers, who tend to be younger and poorer,” Rahman said..
3. The condition of your home can be affected.
If you own a home and have a fixed interest rate, and don’t sell or buy a home anytime in the foreseeable future, you won’t have any stress in this part of your life. If you’re a renter and have no plans to buy a home anytime soon, maybe don’t worry either.
No one else might be so lucky.
“Anyone who has bought a home in recent years with an adjustable-rate mortgage is going to face a rude awakening and possibly much higher home payments the next time the mortgage interest rate resets,” said Stephen Craft, dean of the Hammock College of Business. in Oglethorpe University in Brookhaven, Georgia.
“In general, interest rate increases will help savers, who tend to be older and wealthier, and hurt borrowers, who tend to be younger and poorer.”
Ahmed El-Rahman, assistant professor of economics at Lehigh University
Tenants may also be a little hesitant about parting with their rents. As McCallie explained, “Top Interest rates can greatly increase the cost of borrowing.” So buying a home now can be a little unpalatable, and if your credit isn’t great, you may find it difficult to become a homeowner.
This is because lenders are becoming more selective when lending money, according to Rahman.
“Rahman said greater scrutiny by lenders could mean those with low credit ratings could be squeezed out of the loan markets.
On the other hand, with house prices rising, “it will lead to slower sales and lower prices in some areas,” Rahman said. So for some homeowners, especially those with good credit, you may find it will be easier to buy a home.
Henn noted that while mortgage rates are rising, house prices are falling, so a new homeowner may find that his monthly payments won’t be much higher than they would otherwise be.
4. Higher interest rates may make your next car more expensive.
According to Kelly Blue Book, The average price of a new car is $48,763 – We apologize that this article does not come with the smell of salts.
For several years, it has been difficult to buy new and used cars, depending on what city you live in and what model you’re looking for. Many factors have been blamed, from the pandemic to supply chain issues to microchip shortages and low inventory. Higher interest rates will likely push car prices up even further, experts say.
However, if you are looking for a new or used car, you will not be able to find it. You may not find it at a price to your liking, and it may not be the make, style, or color you were hoping for. Ah, that new car reeks of low expectations.
5. Interest rates affect any loan you want to take out.
You have things to do, so we are not going to mention every type of loan that will be affected by higher interest rates. Suffice it to say that any loan you want to take out will now be more expensive.
Max Jaffe is a general accountant and certified treasurer with TBS Retirement Planning In Hearst, Texas. He has a realistic and interesting way of looking at how devastating high interest rates can be on the debt you have.
“Let’s say your credit card now charges 18% interest,” Jaffe says. “This means that without making any more purchases — and no payments — your credit card balance will double in less than four years. If that rate rises to 24%, that means it’s only three years.” Albert Einstein said, “Doubling interest is the strongest force in the universe.”
(We checked. citation He is mostly It is attributed to Einstein, although it may be an urban legend. And as to whether compound interest is actually the most powerful force in the universe, if there are any universe-controlling villains who would argue with this statement, we might have to agree to disagree.)
Of course, you wouldn’t go three years without making a credit card payment—and if you did, the credit card company would probably close the account with your credit score down, do what’s called an interest charge and potentially stop charging interest. So, fortunately, this isn’t a realistic analogy, but Jaffe says it nonetheless shows what higher interest rates and compound interest can do to debt.
6. High interest rates can affect your business.
Now, don’t worry. Your job may be completely secure. Interest rates may not affect your specific situation at all, and given the labor shortage, Many employers seem reluctant to lay off employees. But then again, your job could be affected.
“People who work in industries or professions that are sensitive to price changes should be concerned,” says Gully. “For example, home sales have generally declined in the face of rising prices. Mortgage lenders and real estate agents are seeing demand for their services decline.”
7. High rates will certainly affect the economy as a whole, although we do not yet know how.
When interest rates rise, the economy in general suffers. This, no one argues. But will the economy somehow improve, or will it get worse? And if worse, a little worse or a lot worse? This is what everyone is wondering.
The whole point of the Fed raising interest rates is to keep inflation in check. Inflation has had Sharpe’s energy and enthusiasm out of control on Bender lately. (You may have noticed). If the Fed could make it more expensive to borrow money, maybe people would save more money for a rainy day than put it into the economy right away. If that happens, prices will rise less quickly. Inflation will be tamed.
That’s the thinking, anyway, and with any luck, the Fed will experiment with setting higher interest rates without crashing the economy. Jaffe gave an example of what often happens when interest rates go up.
“As interest rates go up, companies reduce their loans,” Jaffe said. “This means that the new equipment they were going to buy for their employees is not going to happen in the near term, and if it is purchased at all, it will be in the future.”
Perhaps this hypothetical company would have built a new factory and would need more employees, Jaffe said, and it might have actually hired some.
“Since this plant is not going to be built in the near future, they now have to lay off these new employees. Since these employees no longer have salaries, they spend less, which causes a ripple effect in the economy, and eventually, we have a recession,” Jaffe said. .
Financial experts must be a lot of fun at parties. But remember, it was just an assumption.