Interest rates are an important factor that affects your everyday life and investments. In the short term, a rate hike makes it more expensive to borrow money to buy homes and cars or invest in stocks. In the long run, a higher interest rate helps slow economic growth and curb inflation.
The Federal Reserve controls the cost of borrowing between banks and determines the interest rate you pay on credit cards, home loans and other debt. Each time the Fed raises its key interest rate, it sends ripples through our economy that affect a variety of financial products and consumer habits.
For people who have accumulated credit card debt during the pandemic, higher interest rates will make it more costly to pay off balances, according to research from Morning Consult. But for people who don’t have a lot of debt, the higher rates won’t make much difference in their spending patterns or monthly payments.
Higher rates also affect the way we save, because they impact the APY on savings tools such as money market accounts and CDs. In general, rate increases are bad news for borrowers and good for savers, since they’ll earn more on their savings.
In addition, the Fed’s monetary policy decisions have global effects that can be felt in developing economies as well. In fact, research from economists like Barry Eichengreen and Frank Rose shows that when the Fed raises rates in industrialized countries, foreign investors tend to stop investing in emerging markets. This is what is known as “sudden stop” or capital flow reversals.