The Federal Reserve continues to slug it out with the rising inflation in the country, and this does not look like something that will end anytime soon.
Inflation as a consequence ensures higher interest rates, and this complicates the chance of those who need to borrow money to sustain their families, and businesses. It is a difficult thing to find equilibrium between inflation, and decent interest rates.
Since 2022 began, the Federal Reserve already increased the standardized interest rates four times. It was further raised by 0.75% in June and July with all indicators showing that another increase is already looming ahead.
Are we about to witness another recession?
Unstable Interest rates directly affect business and consumption. It regulates the purchasing power of the people keeping it extremely moderate. What are interest rates, and how does interest rates affect our personal finances?
The Meaning of Interest Rate
Interest rates refer to the cost of borrowing money. It is what it cost you to borrow money, and the actual amount you pay to borrow. You pay interests on student loans, mortgage, credit cards, car loans etc. The interest rate is the profit of a lender for granting out a loan. It usually determines the total amount you pay back when you borrow money. Loans come with different conditions, and before seeking a loan, it is best to understand this loan, the terms and conditions attached, and the interest rate involved. The interest rate usually determine the ease of repayment.
What Concerns the Federal Reserve Raise Interest Rates?
The Federal Reserve determine interest rates. It is also the major tool used to combat inflation. The Federal Reserve regulates the economy by raising or lowering the interest rates which translates to a fast or slow economy. For high inflation, interest rates are raised to slow down the economy, and suppress inflation. When it is too low, interest rates are lowered to raise inflation. It is just simple mathematics when interest rates are raised, the purchasing power of the people gets curtailed, and people are discouraged from spending so as to check inflation.
How to React to a Rising Interest rate
Interest rates affect everyone directly or indirectly. It doesn’t really matter the social class we fall into, the prevailing interest rates determine how we spend or borrow.
If you are wondering how to benefit from a rising interest rate, here is your best advice: Make profit!
Although interest rates are not directly linked to mortgage rates, it affects prospective home owners the most. Mortgage rates rise even as inflation rates increases. For example, a loan of $400,000 commanded a monthly repayment of $1,700 per month a few months ago, but currently sits at $2500 ($800 increase). When you carefully consider this increase, you may understand why Americans are not applying for mortgages as they naturally would. Mortgage applications has decreased recently to an unimpressive 15%. Apparently, people cannot afford to own homes right now due to the rates attached.
Prospective loan seekers should consider securing loans right away as their is a looming increase based on the current projections. Secure a long term loan rate immediately for that new home as the instability experienced currently may continue. The situation is not limited to home owners, even those at the verge of retirement are also affected by high interest rates. Interest rates affect the stock market indirectly by causing it to fluctuate. When interest rates increases, it raises the price of bonds although long-term bonds are more severely affected than short-term bonds. Here is some good news, rising interest rates favour annuities.
Investors secure growth in an economy of rising interest rates by keeping a vast, and diverse portfolio. A little bit of everything; bonds, stocks, cash etc., can be the formula to cushion the effects of rising interest rates, and sustaining economic growth. In all, financial literacy is very essential. Always approach a financial expert to discuss your plans, and get the most suitable financial advice for you.
With the right financial advice, one can navigate the economy whether such an economy goes through a rising or falling interest rate. Never underestimate the power of a financial adviser. Seek the knowledge you need as it pertains to your personal finance, and future to always put your best foot forward.