The Federal Reserve Board (the Fed) recently raised the benchmark interest rate, or the federal funds rate at which banks borrow from each other, for the sixth time since 2015. Because of this change, consumers are also seeing a rise in the interest rates their bank charge them.
When a bank’s federal fund rate increases, they have to, in turn, charge their consumers higher interest rates to make up for it. The Fed believes that by doing this, they can boost the economy and curb inflation. Here are five ways the increased interest rates will affect your wallet.
How Interest Rates Affect Spending
Because banks provide loans or credit to consumers, which allows for more flexible spending, banks have to charge an interest rate in order to get their money back. When interest rates are low, people have more discretionary income to spend which makes them feel more comfortable making big purchases.
When interest rates are increased, consumers tend to cut back on spending. In addition, this higher interest rates often mean the banks are dealing with stricter lending standards. At the end of the day, consumers will spend less, banks will loan less and business won’t have as many customers.
More Affordable Long-Term-Care Insurance Premiums
One positive outcome on increased interest rates is the impact it has on health insurance premiums. With lower interest rates, insurance companies saw less of a return on their investments which retroactively increased the end consumer’s premiums.
But, for long-term-care insurance programs, it’s expected that the higher interest rates will allow the insurance companies to offer more stabilized premiums to people who buy new policies.
Easier Access To Credit For A Reverse Mortgage
For people in retirement, the option to have a reverse mortgage allows them to give up their equity in a home in exchange for payments if they do not have an income. With this loan, the bank makes payments to the borrower based on a percentage of accumulated home equity.
With increased interest rates, this is more attractive to older homeowners because the unused portion of a line of credit will grow as interest rates rise.
Higher Interest Rates And Decreased Inflation
Because the federal fund rate can directly impact all other loan rates, it can also influence inflation and recession. When interest rates are higher, people tend to spend less which also decreases the demand for supply. This is what leads to a decrease in inflation, or the rising cost of goods.
This can be beneficial to consumers who are looking to make larger purchases or business who rely heavily on purchasing products to provide their services because the cost of goods has decreased.
Stock Markets And Bond Prices Will See A Drop
The federal funds rate directly impacts the returns investors see from their certificate of deposits (CD) and U.S. Treasury bonds (T-bonds). That means a higher interest rate will determine how they invest.
In addition, bonds are also impacted by increased interest rates. As interest rates rise, bond prices fall. If interest rates fluctuate, so will the price of a bond.
Lastly, because higher interest rates cause consumers to spend less, it also causes stock prices to drop.