For much of the last 20 years, interest rates have been steadily falling, but rising inflation is not just making almost anything we buy more expensive. It is likely to make borrowing money more expensive as well. In March, the Federal Reserve raised interest rates by 0.25%. The main tool in its financial context is to raise interest rates. The Fed has said it will likely raise interest rates again in each of its six remaining sessions scheduled for 2022 and most likely by 2023.
So what does this mean for consumers as interest rates start to rise? There are four ways in which raising interest rates will affect our pocket money almost immediately.
The cost of residential stock lines will start to rise
As the value of our homes has increased dramatically in recent years, so has the use of mortgages. Inexpensive money lending has allowed many people to pay for home renovations, consolidate their debts, educate their children or just have a source of extra money when needed. Many consumers are unaware that the interest they pay on their home equity lines is not fixed. The interest rate can change at any time and will probably start rising immediately as the Fed raises interest rates. This will result in an increase in interest only on mortgage-backed loans.
Car and home purchases will become more expensive
One of the side effects of the COVID-19 pandemic is that the normal supply chain needed to build homes and cars has been severely disrupted. The result was a shortage of new vehicles in our local car lots and a severe shortage of housing available in our market.
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This shortage has caused prices to rise in an unprecedented way, but is set to worsen. The cost of borrowing money to buy the few cars and homes available will start to rise as interest rates rise. This increased cost of borrowing money will increase your monthly payments to a level that may prevent many from buying a car they need or their dream home.
Debt repayment will become increasingly difficult
One of the advantages of the low interest rates we have experienced in recent years is that many people were able to get out of debt as their monthly payments went to their loan capital and less interest to the lender. That is likely to change dramatically in the coming months as credit card companies begin raising interest rates in response to Fed rate hikes. Thus, more than your monthly payment will simply be used to pay the interest due on the debt. The net result is that it will become increasingly difficult to get out of debt.
Fixed interest rate savings will start to increase
With inflation squeezing our monthly budgets, raising our debt rates and causing more financial pain and the stock market in turmoil, the good financial news seems hard to come by these days. However, there is good news that will come as a result of the Fed raising interest rates.
As the Fed cut interest rates to almost zero, interest rates at banks and short-term bond yields have fallen to almost nothing. This has created a real difficulty for retirees and other dependents on secure earnings to subsidize Social Security and retirement pensions. Thus, those who have been able to save money on fixed interest rate investments are going to receive some interest relief. They will see the returns on their certificates of deposit, high-yield savings accounts, current accounts and their short-term bond portfolios increase. This is good news for those who are retired and find it difficult to make ends meet due to rising costs of daily goods and services as a result of inflation.
So what should we as consumers do as a result of rising interest rates? The most important thing is to realize that the sky does not fall. We may experience some short-term pain, but our economy has proven time and time again that it is resilient because of the strength of the American people.
We have endured the collapse of the Dot-Com bubble of 2000, the financial crisis of 2008, several recessions and a series of less dramatic economic struggles since the turn of the century. Not only have we endured, but we have prospered after every challenge we have faced. The economic challenges we face as a result of the COVID-19 pandemic, such as inflation and rising interest rates, are no different. Not only will we survive these difficult economic times, but we will come out stronger in the end. Let’s make the best financial decisions we and our families can make, let’s make it every day and be thankful for the many blessings we have.
Brian Stivers is the President and Founder of Stivers Financial Services in Knoxville.