An interest rate hike means it costs more to borrow money – for example, when you pay on a credit card balance or an adjustable-rate loan. It can also make it harder to repay debt. For businesses, higher rates cut into profits. In fact, high rates have historically been linked to economic contractions and a slew of problems like unemployment, rising inflation and even a recession.
The good news is that, while borrowers feel the brunt of interest rate increases, savers benefit from them. As interest rates rise, banks can afford to offer a higher return on savings tools like savings accounts and certificates of deposit (CDs) in order to attract new deposits and retain current ones. This, in turn, allows you to grow your savings faster.
In addition, when it becomes more expensive to borrow money, consumers generally reduce the amount they spend on goods and services, cooling overall demand. This is the intention of the Federal Reserve when it raises rates to tame inflation.
However, these effects are not limited to the domestic economy. Academic research by Barry Eichengreen and Frank Rose shows that interest rate increases in industrialized nations are typically followed by a “sudden stop” in foreign investment and capital flow reversals to emerging markets. This has a major impact on global growth. It’s important to keep this in mind as you develop your wealth management strategy.