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What Do Rising Interest Rates Mean For You?

What Do Rising Interest Rates Mean For You?

Anne Marie Phelps, Vice President, Senior Private Banker Fifth Third Bank

 Economic trends have a major impact on the change in interest rates. HELLO Covid! In an emergency response to the 2020 global pandemic, the Federal Reserve cut rates to historic lows to encourage spending and keep our economy afloat. Think lower mortgage rates, lower car loans, lower credit card APR rate, zero interest offers etc. – this translates to more money in consumers’ pockets to spend! All of this spending, translated to higher demand. Higher demand ultimately kicks prices up – that’s economics, baby!

A combination of higher demand AND supply chain issues due to Covid (initially), has led us to a volatile economy with a very high inflation rate. Think less consumer buying power. This is pushing the Federal Reserve to begin increasing rates (in an effort to drop the crazy high prices you’re seeing everywhere) which ultimately pushes all other interest rates higher as well (again- loans, credit cards, mortgages). The main (delicate) job of the Federal Reserve is to adjust rates to help keep stability in our economy.

You guessed it, rising interest rates have a domino effect in our economy. Consumers tend to borrow less money when we are in times of increasing rates. The cost to borrow goes up which makes borrowing less attractive (less unnecessary spending on home renovations, less people looking to upgrade to a vacation home, etc). When consumers are borrowing less, this tends to decrease spending and consumers typically put more in savings. This means there is less money in circulation which can eventually help to decrease inflation (and potentially lead to lower economic activity).

Hey, it’s not all bad news! There are benefits to rising rates that can be taken advantage of. The ultimate goal of increasing rates is to slow the high inflation environment. This will in turn help decrease demand for products and help to bring rising prices back down to a normalized level. *No $5/gallon gas prices?! I’ll take it!

Consumers in the market for housing could also see a benefit. Believe it or not, rates are still considerably low (*In the 80s, mortgage rates were over 18%!!!), so locking in at a low mortgage rate now could be a huge advantage since the future of rates is unknown.

Pro tip! Keep tabs on those variable interest rate loans: typically credit cards, home equity lines of credit, student loans, etc. What once may have been an attractive rate that you were ignoring in hopes of earning more return in the market, may look less appealing to hold on to today. Revisit your interest rates and get rid of the higher interest rate debt with excess cash.

You may also consider refinancing to a fixed-rate loan product if you have a variable loan. This could help by taking advantage of the lower rates that are currently still available.

Another positive aspect of rising interest rates is that banking deposit rates have gone up as well – in some cases as high as 2.5%. Keep an eye out for those enhanced interest rates to get a better yield on your emergency savings or excess cash bucket.

While the stock market is being impacted due to the increasing rates, consumers could take advantage of the low entry points for various stocks to expand their portfolio. *BUY LOW, SELL HIGH. Another benefit is to consider investing in Roth IRA’s to benefit from the tax advantages of purchasing historically well performing stocks at a discounted rate.

The Federal Reserve does not take changing the rates lightly. The overall impact of the change in rate is high and trickles out to many aspects of our economy. No one knows what will continue to happen with rates but there are benefits available that can be taken advantage of in the current economic situation of the rising rates.

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Photo by Olya Kobruseva

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