Financial Tips

What Happens When the Fed Raises Or Lowers Interest Rates?

When the Federal Reserve raises or lowers rates, it usually will have an effect on consumers, raising or lowering interest rates on things ranging from credit cards, to car loans, to savings.

The job of the Fed is to help maintain the nation’s economic stability. To do that it monitors a variety of key indicators, such as employment and inflation information.

If the economy seems to be slowing the Fed might lower interest rates, which can encourage consumers to spend more and businesses to invest more and hire additional employees. Conversely, if the economy seems to be growing too fast, the Fed might raise interest rates, which tends to slow spending and increase the savings rates.

So how does that affect you?

Going down 

If interest rates are cut, certain types of borrowing can become at least a bit more affordable. Credit card interest rates can drop, as can rates for vehicle loans. The same goes for Adjustable Rate Mortgages and home equity lines of credit. These changes – even if only slight – can encourage people to take out loans and spend money. While consumers might notice some changes in as little as 30 days, others can take longer to reach your pocketbook.

However, falling interest rates aren’t always good news. While borrowing rates might come down a bit, interest rates on savings are likely to fall as well. Lower savings yields mean that money you have in a savings account or CD won’t earn as much interest.

Going up 

A Fed rate increase can slow the economy by pushing up borrowing rates and raising the annual percentage rate on savings. If rates rise, it becomes more costly to borrow money. When the Fed boosts its lending rate, consumers and businesses can see increased costs for borrowing, which can discourage spending. Higher costs for credit mean you’ll pay more for goods over time and can even discourage you from making certain purchases.

If there is any good news in higher rates, it’s that financial institutions might raise their annual percentage yields on savings accounts. That means the money you have in savings will actually grow faster. In situations like this, consumers are more likely to put money into savings and wait to borrow until either interest rates or prices start to fall.

If you want to see how changing borrowing and savings rates can affect you, there are a variety of credit card, loan, and savings calculators online that you can use to see what increases or decreases in rates can mean to you and your money.

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