The biggest financial news of the last few months has been inflation and the Federal Reserve’s attempts to bring it under control. Over the course of about a year and a half, the Fed has raised the target interest rate from practically zero to more than 5%.
This has resulted in making many things more expensive for ordinary Americans. Inflation pushed food and gas prices higher, but the Fed’s rate increases have made it far more expensive to take on debt.
But it’s not all bad news. There are several ways that higher interest rates can help your finances.
Savers Benefit From Higher Interest Rates
The most obvious benefit is higher interest rates mean savers are more richly rewarded. We are seeing banks’ high-yield savings accounts offer rates of more than 5% APY, which we hadn’t seen for decades.
If you are concerned interest rates may go even higher, consider no-penalty CDs as a way to lock in rates today but still have a no-cost way out if they go higher.
While this benefit is tempered it bit by higher inflation, it does help consumers get a little more excited by saving money. When you earn 1% or less, it’s hard to convince people it’s a good idea to save money for a rainy day.
Higher Interest Rates Mean A Stronger Dollar
When the Fed increases rates, the dollar is stronger when compared to other foreign currencies.
If you enjoy international travel, this means that your trips, when priced in other currencies, will be slightly cheaper as the dollar gets stronger. The dollar was already doing quite well compared to other currencies, but higher interest rates can only help.
Locally, you may also see prices improve on products and services that are produced outside of the United States.
Homebuyers Feel Pain Now But Can Refinance Later
As mortgage interest rates go higher, the cost of buying a home goes up considerably. Since wages won’t move up as quickly as mortgage interest rates, we’re seeing home prices fall in some areas of the United States.
Nationwide, the St. Louis Fed’s median sales price on houses sold in the U.S. in the fourth quarter of 2022 was $552,600. In the second quarter of 2023, it fell to just $495,100.
As prices fall, homeowners take out smaller loans to buy a house. If interest rates go back down, they would be able to refinance those loans and pay even less.
While there’s no guarantee how interest rates will shift over the next few years, having a smaller loan balance means you have the potential for additional savings if they go down. Interest rates change faster than home prices, especially in a period of rising rates, and homeowners feel locked into a home with a really low rate.
Borrowers Are Incentivized To Pay Down Debt
Those consumers who are carrying significant consumer debt, especially those with adjustable or floating rates, will now be urged to take action. This might be consolidating your debt into a fixed rate or just being more aggressive about paying off that debt.
It’s not a comfortable position to be in, but it might be the push people need to take their consumer debt seriously.
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