Financial stress 'through the roof' as interest rate hikes come home to roost (2024)

FAQs

What would be the effect of high interest rates have on people who want to borrow money? ›

Higher interest rates can make borrowing money more expensive for consumers and businesses, while also potentially making it harder to get approved for loans.

Higher interest rates mean higher payments on many mortgages and loans. So people with those things need to spend more on them and have less to spend on other things. Higher interest rates also mean savers get more return on their savings. And potential borrowers find it is more expensive to take out a loan.

Three of the most evident are: They increase the cost of borrowing for individuals, potentially reducing spending; they increase the cost of borrowing for businesses, potentially reducing investment; and they can tighten the money supply, which can reduce inflation.

When rates increase, meaning it becomes more expensive to borrow money, consumers react by refraining from making large purchases and pulling back their spending. The idea is that in today's high inflationary environment, this decrease in consumer demand can help bring prices back down to “normal.”

Nevertheless, some sectors benefit from interest rate hikes. One sector that tends to benefit the most is the financial industry. Banks, brokerages, mortgage companies, and insurance companies' earnings often increase as interest rates move higher because they can charge more for lending money.

Since savers don't know which way rates will move next, advisers often recommend a CD ladder. This means buying a series of CDs with progressively later maturity dates. Laddering ensures that some portion of your savings matures each year and can be spent or moved into other investments as rates change.

Rate hikes make it more expensive to borrow, discouraging consumers from making large purchases and companies from hiring and investing.

The Bottom Line. If you're wondering what happens when interest rates rise, the answer depends on the portion of your finances. Rising interest rates typically make all debt more expensive, while also creating higher income for savers. Stocks, bonds and real estate may also decrease in value with higher rates.

Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.

Whenever the Federal Reserve lifts rates to battle high inflation, the risk of a recession increases, and the US economy has typically fallen into an economic downturn under the weight of rising borrowing costs.

Does the government make money when interest rates rise? ›

The Fed also issues cash, which pays no interest, so the Fed makes steady money on the difference between interest-bearing assets and the zero return of cash. But when the short-term rates the Fed pays rise sufficiently to make its interest expenses greater than its interest earnings, the Fed loses money.

The recent upturn in interest rates means the cost of financing government debt is more expensive. According to the U.S. Treasury, the average interest rate for all federal government-issued interest-bearing debt has jumped in recent years, to 3.28% as of June 30, 2024.

The Federal Reserve determines the price of borrowing money through one of its primary interest rates, the fed funds rate. The fed funds rate influences various financial decisions and products, such as credit card rates and mortgage rates.

When interest rates rise it's also more expensive for businesses to borrow money. This often means less growth and lower profit expectations. In theory, this should lower the share price of a company.

High-yield savings accounts are ideal places to park your money when you want your savings to grow. APYs have gone up because of Federal Reserve rate increases, making now a good time to open a high-yield savings account.

If interest rates rise, borrowing could become more expensive for you. Whether you are looking to get a mortgage to buy a house, or a new car on credit, it's crucial to think about what higher costs mean for you.

What effect do rising interest rates have on the economy? Borrowing, spending, and demand decrease, thus lowering the inflation rate.

What effect do higher interest rates have on borrowing? Higher interest rates essentially mean that your borrowing power will reduce. A higher interest rate increases the cost of repayments for you and lenders want to ensure that they are lending to those who can handle higher rates.

For fixed-term loans, like mortgages, a rate increase means a higher monthly payment. For revolving accounts, like credit cards or lines of credit, higher rates mean less of your monthly payment goes to the principal, so it will take longer to pay off your balance.