Rising Interest Rates: Impact on Consumers and the Economy (2 min. read)
Written by Vantage Wealth and Tax Advisor Jarrod Hart
Interest rates hitting a 16-year high have raised concerns about the impact on the economy and consumers. The Federal Reserve’s decision to raise interest rates is aimed at tackling rising inflation, which has been a persistent concern since the economy reopened in mid-2021.
While the Federal Reserve initially believed that inflation was transitory, eight interest rate increases later, they are now taking a more proactive approach to combat inflation. The recent decrease in the month-over-month inflation rate from its June 2022 high of 9.1% down to 6.4% is a positive sign. However, the Federal Funds Rate, which influences consumer interest rates, has hit a 20-year high of 4.58%, which can have a significant impact on borrowing costs for businesses and consumers.
The Federal Reserve has three tools to manipulate the economy: open market operations, the discount rate, and reserve requirements. By raising the Federal Reserve rate, the Fed is trying to slow the economy by making it more expensive to borrow money. While there is debate about how high the Fed needs to increase rates and the timing of future increases, it is widely agreed that more increases are on the horizon.
The impact of rising interest rates can be significant for consumers, particularly those with variable-rate loans such as mortgages and credit cards. An increase in interest rates can result in higher monthly payments and can also make it more challenging to obtain credit. On the other hand, rising interest rates can benefit savers who can earn more on their savings accounts and other investments.
The recent increase in interest rates is a reminder that the economy is constantly evolving, and the Federal Reserve must take action to maintain stability. While the long-term impact of higher interest rates remains to be seen, it is crucial for consumers and businesses to be aware of the potential effects on borrowing costs and their financial plan.
Contact your Vantage Financial Advisor to review your plan and discuss how we are proactively positioning our clients for rising interest rates.