Interest rates

Why are interest rates rising? What investors need to know

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It would be nice, almost unusually peaceful, if a new notion didn’t attack your wallet every day. You work full time at one job, sometimes multiple jobs, just to keep the lights on and the food in the fridge – so why can’t the economy put its house in order?

The cost of goods, food and services has been steadily rising, so it’s no surprise that interest rate also go up. But why are interest rates rising and why does everything seem so expensive?

Rising Interest Rates Key Takeaways

When exploring the reasons behind a problem’s causes, what, who, when, where, and why, breaking it down piece by piece sometimes helps to understand the whole story.

  • What: What are the interest rates? Essentially, these are the fees associated with borrowing money. The government sets reference rate and banks charge interest accordingly when loans are lent or borrowed.
  • Who: Who is responsible for rising interest rates? The Federal Reserve is responsible for the rise in interest rates. The intention behind this is to slow down inflation by slowing down the economy. It may seem counterintuitive, but if people stop buying so many things – or can’t afford to – it lowers aggregate demand.
  • When: The COVID-19 pandemic is not only devastating emotionally, but also economically. Interest on short-term borrowing rates has just recently increased by 0.75 percentage points, which is on track to reach the target range of 3.75% to 4.00% in 2022. This is the highest level since January 2008. These increases could continue until inflation is deemed to be under control.
  • Where: Where will you feel the rise in interest rates the most? As interest rates generally appear where lending and borrowing occurs, you will feel these rising rates as an investor in stocks, fixed income securities or someone who puts a lot of money in an account. savings.
  • Why: Rising interest rates are directly correlated with rising inflation. When interest rates are higher, it can be more daunting to buy a house or a car or take out a credit card. Raising interest rates is meant to fight inflation by slowing the purchase of goods, business growth, and basically the entire economy.

What are the interest rates?

Ideally, everyone would have just enough money to buy whatever they want, but in reality, with big spending comes big borrowing. When you borrow money, unless it’s from a friend or family member, chances are it’s from a financial institution, such as a bank. The additional expense on the loan is the interest rate. These are the fees that are worth it for the bank to lend you that amount.

High interest rates mean more money out of a borrower’s pocket, especially when you’ve been paying something back for years. When interest rates go up, sales go down, which is ultimately the intention.

Interest rates are determined by benchmark rates set roughly by the Federal Reserve. Banks use this as a guide to determine what interest rates to charge you for your loan. There is no fixed rate and other factors, such as your current credit score and your history, play a role in deciding your rate and how much you will ultimately pay.

What are benchmark interest rates?

As mentioned above, reference rates are the standard set for interest rates when lending or borrowing money. This standard is used in many areas of debt, both professional and personal. Reference rates are used as a benchmark to determine the level of interest rates, as well as how often banks lend money.

Who raises interest rates?

Even with the best of intentions, you may still feel like the government is putting unnecessary strain on your finances at times. When it comes to raising interest rates in the United States, the responsibility lies with the Federal Reserve. The committee that sits above the Federal Reserve and makes the call to raise or lower interest rates is the Federal Open Market Committee (FOMC). It can and often does change interest rates to support economic growth or avoid economic recession.

Interest rates are not only rising domestically, but also globally. When it comes to setting benchmark rates, the Federal Reserve has the most influence. The two main reference interest rates are the federal funds rate and the London interbank offered rate.

Federal funds rate

The role of the federal funds rate is to influence monetary policy. It is determined by the FOMC and is the target rate on which banks base their interest when lending to customers, businesses or other banks. The current federal funds rate is 3.75% to 4.00%, which indicates the minimum and maximum value.

London Interbank Offered Rate

In the global economy, the London Interbank Offered Rate, or LIBOR, plays a role in setting the benchmark rate for lending in markets around the world. When the biggest banks in the world need to borrow money from each other, the interest rate at which they do so is based on the LIBOR rate. This rate is considered the median rate based on these global banks and financial institutions.

When will interest rates go down?

As inflation rises and continues to oppress the rate at which people spend, interest rates also change. Unfortunately, it is estimated that rates will be raised again in 2022. The FOMC meets in December and is expected to raise interest rates by 0.5 percentage points.

It is also estimated that interest rates will continue to rise in 2023, but not with the frequency they had in 2022. It’s not as comforting as reading that rates will go down, but it’s better than nothing.

Where to invest when interest rates rise?

When it comes to the economy, everything is linked. Inflation affects interest rates which affect investments. This does not mean put your money under a mattressbut it’s good to know how some of the ways you invest could be affected by a rise in interest rates.

Investments such as fixed income investments, equity investments or savings accounts can be affected differently by rising interest rates.

Fixed income investments

Fixed income investments are considered less risky investments, since the bond prices is based on the interest rate paid by the bond and not necessarily on the growth rate of the company. Whenever possible, be sure to invest in the shortest duration bond available. When interest rates are high, you can lose money investing in a longer-duration bond if you have to sell before the bond matures.

Equity investments

Where fixed income investments are a bit safer, equity investments are a bit riskier. The stock market often dips when interest rates rise. Larger companies tend to fare better, while smaller companies with high-growth stocks fall the most.

Savings accounts

The good old savings account. When something is created for a rainy day, it’s always good to check the weather. One of the few benefits of high interest rates is that they also increase interest on a savings account or certificate of deposit.

Why are interest rates rising?

So why are interest rates rising? The simplest explanation is that interest rates are rising because of inflation. The Federal Reserve raises interest rates to slow inflation by slowing economic growth. This trend is expected to continue throughout 2022 and into 2023.

Last takeaway

Inflation weighs heavily on the economy, there is no doubt about it. Everyone is struggling with this, from families to businesses. Experts say raising interest rates is the way to fight the inflation monster, but in the end it doesn’t make milk cheaper.

FAQs

  • What is the Fed’s interest rate today?
    • After a fourth consecutive rate hike of 0.75 percentage points, the current Federal Reserve rate, or Federal Reserve Funds rate, is 3.75% to 4.00% in November 2022.
  • Will interest rates rise in 2022?
    • It is estimated that at the next meeting of the Federal Reserve in December 2022, there will be a 0.5 percentage point increase in interest rates.
  • When is the next Federal Reserve meeting in 2022?
    • The next meeting of the Federal Reserve, which is hosted by the Federal Open Market Committee (FOMC), is scheduled to take place from December 13, 2022 to December 14, 2022.
  • Will interest rates rise in 2023?
    • It is estimated that interest rates will continue to rise throughout 2023. Although they are rising, they will not rise as quickly as they did in 2022.

Information is accurate as of November 14, 2022 and is subject to change.

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