A change to the price of money has ripple effects that reach from your checking account to your mortgage. A hike or cut by the Federal Reserve changes the interest rates on savings accounts, certificate of deposits and credit cards. It can also impact the prices of things you buy, including homes, cars and college educations.
When the Fed raises interest rates, it does so with a specific goal in mind: to tame inflation without sending the economy into a recession. It’s a delicate balance. But higher rates may make it more expensive to borrow, and they can also boost the payout on saving account products or slow the growth of equities and real estate.
It’s important to consider the impact on your finances before making any big purchases that require a loan. A rising interest rate typically makes debt, from student loans to car payments and credit card balances, more expensive. That’s why it’s a good idea to focus on paying off high-cost debt and boosting emergency savings as a bulwark against economic setbacks, says McBride.
A slew of factors can affect the overall economy, including how efficiently capital is allocated. Too much “free money” — like the ultra-low rates that were in place for more than a decade after the global financial crisis — can create inefficiencies, such as when unprofitable companies with no prospect of sustainability hang on to an infusion of cash. A rise in rates tends to ration capital across the economy, steering resources toward growing enterprises that can put it to work.