The Fed is raising its key interest rate, making it more expensive to borrow money for homes and cars. But it may also be good news for those who have been putting money into savings.
In a nutshell, the Fed raises rates when it wants to decrease economic demand and restore price stability. When the economy is healthy and inflation is low, however, the opposite is true. That’s why the Fed waited so long to act after its first rate hike in 2015.
While the Federal Reserve has not yet signaled how many more rate increases it plans to make, San Francisco Federal Reserve Bank President Mary Daly has suggested that officials have only a few more modest cuts before reaching neutrality. Other Fed officials, such as Minneapolis Federal Reserve Bank President Neel Kashkari, have sounded more cautious, saying it will take a “significant downturn” to reach neutrality.
Aside from changing the interest you pay on your loans, higher rates will probably also impact other financial products you use. For example, mortgage rates on new home purchases tend to go up along with the Fed’s target rate; and auto loan rates (on both private and federal debt) are often tied to banks’ prime rate, which is influenced by the Fed’s decisions.
The Fed’s hawkish policy could also have international consequences, as higher interest rates limit credit available to developing economies as they transition from fossil fuels to renewable energy. So, while an American recession is the biggest risk of a rate increase, the reverberations will likely be felt globally.