The Fed increased interest rates again — here's why you should save more and pay off debt in response (2024)

FAQs

What is the benefit of the Fed raising interest rates? ›

On the positive side, higher interest rates can benefit savers as banks increase yields to attract more deposits. The average savings yield is now almost 10 times higher than it was when the Fed first started raising rates, and online banks often offer even higher yields.

The national debt is projected to climb rapidly over the next several years, and higher interest rates could make the nation's fiscal outlook even worse.

How does raising interest rates help inflation? The Fed raises interest rates to slow the amount of money circulating through the economy and drive down aggregate demand. With higher interest rates, there will be lower demand for goods and services, and the prices for those goods and services should fall.

The Fed is the nation's central bank, and perhaps the most influential financial institution in the world. It is charged with helping the U.S. maintain stable prices (inflation), promote maximum sustainable employment and provide for moderate, long-term interest rates.

With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.

The higher your savings interest rate, the larger the return you should receive on your money – although the total return you receive will also depend on factors such as whether the interest rate is fixed or variable and whether you face any charges or penalties due to your management of the account.

Economists at the Penn Wharton Budget Model estimate that financial markets cannot sustain more than twenty additional years of deficits. At that point, they argue, no amount of tax increases or spending cuts would suffice to avert a devastating default.

The public owes 74 percent of the current federal debt. Intragovernmental debt accounts for 26 percent or $5.9 trillion. The public includes foreign investors and foreign governments. These two groups account for 30 percent of the debt.

The largest holder of U.S. debt is the U.S government. Which agencies own the most Treasury notes, bills, and bonds? Social Security, by a long shot. The U.S. Treasury publishes this information in its monthly Treasury statement.

Since savers don't know which way rates will move next, advisers often recommend a CD ladder. This means buying a series of CDs with progressively later maturity dates. Laddering ensures that some portion of your savings matures each year and can be spent or moved into other investments as rates change.

What are the disadvantages of increasing interest rates? ›

Higher interest rates tend to negatively affect earnings and stock prices (often with the exception of the financial sector). Changes in the interest rate tend to impact the stock market quickly but often have a lagged effect on other key economic sectors such as mortgages and auto loans.

Savings account rates are loosely linked to the rates the Fed sets. After the central bank raises its rate, financial institutions tend to pay more interest on high-yield savings accounts to stay competitive and attract deposits.

For centuries, economists have known that reckless money printing causes inflation. And that inflation then causes higher prices, higher paper profits and higher paper wages. Since the beginning of our current inflation, corporate profits have taken the brunt of this scapegoating.

There are a variety of reasons why it is hard to control inflation. When prices are higher, workers demand higher pay. When workers receive higher pay, they are able to afford more goods, which increases demand, which then increases prices, which can lead to a possible wage-price spiral.

Financial Sector

This provides financial institutions with higher returns on their Credit Cards, loans and other forms of debt. Inflation can also drive asset prices up, leading to higher profits for financial institutions that invest in such assets.

The downside of higher interest rates is that they tend to hurt most other types of investments, particularly stocks. The idea behind raising interest rates is that it can help slow down inflation by putting a damper on the market. But slower economic growth usually leads to challenging market conditions.

Higher interest rates can't stop the impact of these kinds of things. But they can slow down new causes of inflation that follow on from these shocks. These new causes include things like businesses putting up their prices because they face higher costs themselves.

A rise in interest rates automatically boosts a bank's earnings. It increases the amount of money that the bank earns by lending out its cash on hand at short-term interest rates.

The Fed pays interest on reserves to banks and to other financial institutions that have, effectively, made deposits at the Fed. As long as the Treasury interest the Fed receives is greater than the interest the Fed pays, the Fed makes money. It spends some, and returns the balance to the Treasury.