Interest rates are powerful economic levers that influence consumer behavior, business investment and the broader pace of economic growth. Set primarily by central banks like the Federal Reserve, these benchmarks send signals that ripple across lending, saving and spending decisions throughout the economy. Understanding how interest rates change and affect financial outcomes is essential for anyone managing money, whether as a saver, a borrower or an investor in stocks.
Rate hikes aren’t good for borrowers because they make credit card debt or personal loans more expensive, but they are good for savers, who see higher returns on their savings tools. Rising rates also incentivize people to spend less and save more, which can help slow consumption, a key factor driving inflation.
As a general rule, businesses that deal in consumer goods or services will benefit from a rate increase, as they can charge more to cover their overhead expenses. The inverse is true of companies that manufacture or produce business-to-business products and services. For example, when rates rise, the cost of financing a business expansion can become more costly, which may reduce overall profitability.
Interest rates are inversely related to bond prices, so when the Fed raises them, bonds generally fall in price. This can impact the financial industry as a whole, but it’s especially difficult for fixed-income investors who hold individual bonds to maturity. The longer the bond’s duration, the more its price fluctuates in response to interest rate changes.