Interest rate increases have become a reality for Americans, as the Federal Reserve aims to control inflation and bring the nation back to pre-recession conditions. Rate increases in a healthy economy are fairly standard, but they do have an impact on investors, the average citizen, and even large corporations.
There has been speculation in recent weeks that the Federal Reserve would speed up the pace of interest rate increases, which left some concern in the markets and throughout the country. Today we now have news that the Fed will increase rates in June as planned, but there will likely be no change in the frequency of rate hikes.
This will be relieving for investors for a number of reasons. Higher interest rates have the potential to impact a number of markets significantly, with some of the most prominent changes including:
- Higher cost mortgages and fewer buyers leading to a decline in the home market.
- Increased cost of lending could reduce business investment and growth, leading to lower stock confidence.
- Costly lending for consumers could reduce spending in consumer and luxury goods markets, reducing sales growth for American businesses.
- Higher interest rates can result in slowed economic growth.
Not the Worst Case Scenario, Considering the Alternative
It’s important to remember why interest rates are so low. The Federal Reserve took interest rates down to stimulate economic growth and offset the effects of the last major recession. By stimulating borrowing, spending increased and the economy started to wind its way back up to healthy levels. Although we have enjoyed low interest rates for so long, the reality is that a more balanced interest rate between 4% and 5% is most ideal.
Ten years of low rates and other factors have led to the strongest economy that we have seen in some time. Slight increases over time will help to prevent unsustainable growth and high inflation. Currently, the 2% inflation target is being met, and the Federal Reserve will proceed with their increases as planned, unless the situation changes in any significant way.
Steady Increases Should Minimize the Real Impact
Sudden, frequent, and drastic increases would hurt the economy and would be especially damaging to low and middle class families and investors. The Federal Reserve is managing things in the best possible way at this time, and any investor should see steady interest rate growth as the best possible outcome after such a long period of stagnation.
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