Over the past year or so, the financial news has been dominated by talk of the Federal Reserve and its strategy of raising interest rates to help slow inflation. This policy makes it more costly to borrow money and hurts economic growth. I also recently wrote about one of the benefits of higher interest rates in a recent blog post, 3 Best Places To Park Your Cash Right Now. Today, I wanted to take a look at how high interest rates both help and hurt our economy.
First, let’s take a look at some of the negatives of living with high interest rates:
- Higher mortgage rates: Unless you’re buying a home with cash, it is going to be more expensive buying a home when mortgage rates are higher. Even if you already own your home, if you have an adjustable-rate mortgage, your monthly payment is going to go up.
- Higher credit card rates: This can make it more expensive to borrow money for everyday expenses, which can put a strain on household budgets.
- Higher costs to operate businesses: Businesses often have to borrow money to pay for things like inventory, payroll, and rent. When interest rates are high, these costs can go up, which can reduce businesses’ profits. Additionally, businesses with a lot of debt may find it more difficult to make their loan payments, which could lead to bankruptcy.
To summarize the downside, high interest rates make it harder to borrow money and less attractive to buy things, especially big-ticket items. Everybody and every business has to tighten their belts.
Now, let’s look on the bright side of high interest rates:
- Great for savers: CDs, savings and money market accounts all pay higher interest rates, making it more attractive to save money in low-risk investment vehicles. This applies to both individuals and businesses.
- Reduces inflation: When it costs more to borrow money, businesses may be less likely to invest and hire new workers. Additionally, consumers may be less likely to spend, which can lead to job losses and a decline in economic activity. This can help to bring down prices, which can benefit businesses that sell goods and services.
To summarize the upside, high interest rates make saving money worth it and without much risk. They also help drop prices, eventually, of almost all goods and services.
Please comment or send an email if you have any questions. Thanks!
Joe Baker, CFP®
Baker Asset Management, LLC
