The Fed has already raised interest rates several times this year, and they could continue to rise this fall. This could affect everything from mortgages to credit card rates.
Why the Fed Is Hiking Rates
The Federal Reserve has been raising its target interest rate in an effort to slow the economy and curb inflation, which is currently at the highest level in 40 years. The goal is that by making borrowing more expensive, consumers and businesses will be less likely to buy as much stuff. That will reduce demand, which will cause prices to fall and bring inflation back down to the Fed’s target of 2%.
However, there are some concerns that rising rates may trigger a recession. This is why the Fed has been cautious to gradually raise rates, rather than slash them to near-zero levels following the 2008 economic crisis.
While higher interest rates do make it more expensive to borrow, they also offer some benefits to savers. One is that saving money in a bank or credit union will now earn more, providing a better return on investment for those with some extra cash.
Investors should expect some volatility when the Federal Reserve decides to increase interest rates, and it’s important to stay focused on your long-term goals. However, some areas of the market, especially those with high leverage or low liquidity, are more sensitive to rate changes than others. Fortunately, gradual and well-telegraphed rate hikes can help the economy adjust without severe disruption.
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