A “for sale” sign is displayed outside a home in Washington, DC, in March.
(Stefani Reynolds/AFP/Getty Images)
Borrowing costs are rising
Every time the Fed raises rates, it becomes more expensive to borrow. That means higher interest costs on mortgages, home equity lines of credit, credit cards, student debt and car loans. Business loans will also be more expensive, for businesses large and small.
Good news for savers
Low rates have penalized savers. Money stashed away in savings, certificates of deposit (CDs) and money market accounts earned next to nothing during Covid (and for much of the last 14 years, for that matter). Adjusted for inflation, savers have lost money.
The good news, however, is that these savings rates will increase as the Fed raises interest rates. Savers will start earning interest again.
The Fed’s free money was amazing for the stock market.
The higher rates have been a major challenge for the stock market, which had grown accustomed to, if not addicted to, easy money. US stocks fell in a bearish market on Monday amid fears that the Fed’s aggressive rate hikes will plunge the economy into recession.
At the very least, rate hikes mean the stock market will face more competition from boring government bonds.
The goal of the Fed’s interest rate hikes is to control inflation while keeping the labor market recovery intact.
However, it will take time for the Fed’s interest rate hikes to start reducing inflation. And even then, inflation will still be subject to developments in the war in Ukraine, the supply chain disaster and, of course, Covid.