The Federal Reserve Hikes Interest Rates, and Some Are Happy
The Federal Reserve decided to hike its short-term interest rate for only the second time since the Great Recession. While mortgages and other forms of credit will get pricier, there will also be some benefits for consumers stemming from the move.
Mark Wilson recently broke down those benefits in an article for Bankrate.
One of the biggest benefits of higher interest rates will be higher returns for savers.
One- and five-year certificates of deposit have recently paid less than 1 percent interest – something that makes these safe-but-lousy investments.
We’re still a long way from seeing the glory days of 3-4% interest on shorter-term CDs, but things are now moving in the right direction.
Higher interest rates will also work to tame inflation. The Fed has traditionally raised rates when inflation pushed past its target rate (of 2%, usually). Higher rates tighten the money supply. Less easy credit usually translates into less upward pressure on prices.
Another benefit from higher rates will be an increase in lending. After all, lenders like it when they can make more money on loans, and higher interest rates is how they do this.
Wilson also points out that higher interest rates should strengthen the dollar against other currencies, giving U.S. consumers more buying power when traveling abroad.
Of course, the dollar hasn’t really needed any help recently. It is now quite strong against other currencies, including the Yen, the Pound and the Euro. But the Fed’s move may strengthen the Greenback even more.
As you’ve no doubt surmised, there are good and bad outcomes from rising interest rates. What the Fed hopes is that the move works to strengthen the economy.
It also looks forward to having the option of moving rates lower should the economy fall into recession. For years now, the Fed has been on a tightrope, without a net below.
The Fed’s traditional method of countering economic slowdown was removed as interest rates remained at historic lows following the financial crisis. A few more rate increases and the Fed will get its safety net back.
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