How Rising Interest Rates Affect The Economy and You
If you have been following the news for some time now, you might have noticed that the Federal Reserve has raised interest rates by 0.25 percent. Although the figure seems to be fairly insignificant, it can have a huge impact on the economy as a whole. Starting from the stock market right down to your household.
So what is meant by rising interest rates? Essentially, when the Federal Reserve chooses to hike their interest rates, it makes it difficult for banks to borrow from the Federal Reserve. In order to compensate this, banks raise their interest rates on loans and credit cards which directly impact the laymen.
This means that even if you borrow less, your interest will prove to be expensive.
Rising interest rates can slow down the economic growth of the nation since consumer spending as well as investments will fall back.
Here is how rising interest rates will affect the economy.
Rising Interest Rates Will Impact Credit Card Rates
If you happen to have a credit card with a variable interest rate, then it is important to know that these rates are directly tied to the interest rates imposed by the Federal Reserve. In the event of a hike in the rate of interest, credit card rates.
For people who already have high credit card debts, a rising interest rate could prove to be a heavier financial burden. People in such situations are likely to be better off if they take care of their pending accounts before the interest rates affect them. If you are someone with a fairly good credit score, you can negotiate lower interest rates with your bank or request a balance transfer.
Affect On Stocks and the Overall Equity Market
In essence, it takes up to 12 months for the full effect of rising interest rates to be felt throughout the economy. A rise in interest rates can affect investments and all investment related decisions. The impact of rising interest rates is not directly felt by the stock market rather it directly affects banks since they are charged higher rates for borrowing and lending from other banks.
When banks raise their interest rates, businesses are forced to cut back on spending for growth and this in turn causes cash flow to drop. A drop in the overall revenue and cash flow causes the stocks of the company to lower in value. This is just the case of a single company. Rising interest rates are likely to affect major businesses across different sectors and this in turn reduces the value of stocks of key players in the stock market. As a result, the whole of the stock market is affected, and major indices show a drop in numbers.
A poorly performing stock market puts off investors since the volatility of stocks are at an all-time high. Investing in stocks and equities turns out to be highly risky.
Rising Interest Rates Affect Real Estate
Although it appears as if real estate is influenced largely by the supply and demand for property, interest rates play a crucial role in property prices. This can be explained rather simply. Rising interest rates means higher expenses for the people who are selling a property.
In order to compensate these expenses, sellers are likely to demand a greater return on their property. This affects property prices which are likely to increase across the country. Potential buyers are faced with increased property prices and the appeal of buying property during a time when interest rates are rising goes down as a whole.
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How Rising Interest Rates Affect You
Across the nation, borrowing money becomes riskier and finances are managed tightly in every household with rise in credit card rates and mortgage rates. As a result disposable incomes starts to dwindle since members of a household still have to pay their bills and look after all other expenses. This means consumer spending reduced drastically, once again affecting business, especially the consumer discretionary sector. Reduced consumer spending further tightens the economy.
Positive Impact on the Financial Sector
While most industries are negatively impacted by the rise in interest rates, the financial sector actually benefits from rising interest rates. This is because lending agencies such as banks, credit unions, and insurance companies tend to charge higher rates on lending which results in an increase in the earnings of such financial institutions. Key players in the bank industry like J.P Morgan & Chase, the Goldman Sachs Group, and a few others stand to benefit the most during a period of rising interest rates.
Boost for Retirement Savings
Increasing interest rates bring better return on retirement savings. This means that retirees living off of their retirement savings are likely to benefit from a hike in interest rates. Rising interest rates have been proven to have a positive impact on cash deposits on savings accounts.
Disclaimer: This article is written purely for entertainment. Any financial decisions should involve a licensed financial professional.