As interest rates rise, borrowing money to buy a home or car becomes more expensive. But if you’re saving money, you’ll earn more interest on your savings as the rates go up. When it comes to wealth management, an interest rate hike can impact everything from mortgages to savings accounts to CDs.
The Federal Reserve controls the federal funds rate, which is the short-term interest that banks charge each other to borrow money overnight. The Fed raises or lowers this rate to affect inflation, curb spending or stimulate growth. They typically prefer gradual changes to avoid the risk of leading the country into a recession, but soaring inflation and rising global demand can prompt them to act more quickly.
Consumers can benefit from lower rates by refinancing high, variable-interest debt before interest rates increase again. Private student loan borrowers, for example, could save on their monthly payments by refinancing to a fixed-rate loan.
Businesses can also benefit from lower rates, particularly those that need to borrow capital to grow their operations. But a business can’t spend all of its profits on paying interest to finance growth; it must also invest in new equipment and hire more workers.
The stock market can fluctuate with changing interest rates, but it’s important not to let the latest news distract you from investing in long-term wealth building strategies. As Nick True explains on his personal finance blog, “If you let short-term fluctuations dictate your investments and savings decisions, you’ll be chasing immediate gains while instilling overarching bad habits.” Luckily, there are many ways to minimize the effects of a rising interest rate.