A rise in interest rates can affect everything from the annual percentage rate, or APR, on your credit cards to the APY on your savings accounts. It’s all part of the Federal Reserve’s effort to fight inflation, slow down the economy and ward off a recession.
When the Fed raises interest rates, it makes it more expensive for commercial banks to borrow money from the central bank. That extra cost gets passed on to consumers and businesses who use credit cards, mortgages or other loan products. When it costs more to borrow, people tend to spend less, which helps reduce inflation.
But raising interest rates can also curb economic growth by making it more expensive for businesses to expand. That can cause some companies to stop hiring or invest in new equipment, which can lead to job losses and more spending cuts.
The Fed’s goal is to keep inflation under control and avoid a recession, but there’s a fine line between that and pushing the economy too hard. If the Fed keeps raising interest rates, it could lead to higher inflation and a slower economy.
When interest rates rise, savers can expect to see a higher return on their investment in savings accounts and CDs. That’s great news for those with cash stashed in the bank, but it’s bad news for borrowers. Increasing interest rates make it more expensive to take out loans, such as credit card debt and mortgages, which causes people to spend less.