Pros and cons of Fed raising interest rates in today's economic conditions—and how you can benefit (2024)

FAQs

What are the pros and cons of raising interest rates? ›

This encourages consumer and business spending and investment and can boost stock prices. Lower rates can also lead to inflation, which undermines the effectiveness of low rates. Higher rates discourage spending and can depress company returns and, therefore, stock prices.

When the Fed raises interest rates — which makes it more expensive for consumers and businesses to borrow money — its goal is to decrease demand and restore price stability.

Higher interest rates increase the return on savings. They also make the cost of borrowing more expensive. Higher interest rates help to slow down price rises (inflation). That's because they reduce how much is spent across the UK.

With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.

Negative rates fight deflation by making it more costly to hold onto money, incentivising spending. Theoretically, negative interest rates would make it less appealing to keep cash in the bank. But the big problem is instead of earning interest on savings, depositors could be charged a holding fee by the bank.

By keeping interest rates low, the Fed can promote continued job creation that leads to tighter labor markets, higher wages, less discrimination, and better job opportunities —especially within those communities still struggling post-recession.

A higher rate helps decrease inflation and a lower one helps it rise.

While rates remain high, financial advisors suggest putting money in high-yield savings accounts and locking in the high rates for the longer term with CDs. Advisors also recommend investors reassess their stock portfolios, as some sectors do better in an environment of high interest rates.

As interest rates on U.S. Treasury securities rise, so too will the federal government's borrowing costs. The United States was able to borrow cheaply to respond to the pandemic because interest rates were historically low.

Higher interest rates increase the cost of borrowing, reduce disposable income and therefore limit the growth in consumer spending. Higher interest rates tend to reduce inflationary pressures and cause an appreciation in the exchange rate.

How can today's high interest rates be a disadvantage? ›

Interest Rates and The Stock Market

When interest rates rise it's also more expensive for businesses to borrow money. This often means less growth and lower profit expectations.

By increasing borrowing costs, rising interest rates discourage consumer and business spending, especially on commonly financed big-ticket items such as housing and capital equipment.

Higher interest rates can make borrowing money more expensive for consumers and businesses, while also potentially making it harder to get approved for loans. On the positive side, higher interest rates can benefit savers as banks increase yields to attract more deposits.

A higher interest rate environment can present challenges for the economy, which may slow business activity. This could potentially result in lower revenues and earnings for a corporation, which could be reflected in a lower stock price.

Who benefits and who is hurt when interest rates​ rise? Corporations with immediate capital construction needs are worse off. Households with little debt, saving a significant fraction of annual income for retirement, are better off. The federal government running persistent budget deficit is worse off.

Rising interest rates affects spending because the cost of borrowing money goes up. So, if you have a mortgage, any type of credit card or a loan, you could end up paying more for the money you originally borrowed. This will mean that you inevitably have less money to spend on goods and services.

Interest rate risk is the potential that a change in overall interest rates will reduce the value of a bond or other fixed-rate investment: As interest rates rise bond prices fall, and vice versa. This means that the market price of existing bonds drops to offset the more attractive rates of new bond issues.

A higher interest rate environment can present challenges for the economy, which may slow business activity. This could potentially result in lower revenues and earnings for a corporation, which could be reflected in a lower stock price.