Interest Rates are on the Rise. What Does That Mean and How to Act?

Don’t Miss Out On the Last Chance

Why Are Interest Rates Rising?

The loans governments provided to businesses and civilians were at close to zero interest rates. On top of the zero interest rates, they also printed money to back their support. This created a massive expansion of the monetary system that is not sustainable. Once the pandemic effects wore off, the governments started to take the money out from the streets. Taking money out of the streets means raising those interest rates that they have dropped during the pandemic.

What Happens When Interest Rates Rise?

When interest rates rise, this doesn’t only happen with the interest you receive. It also increases the money you lend. So, if you are going to buy a house with a mortgage, you will be paying higher interest rates on your loan. The same goes for businesses that need loans to expand or invest in their businesses. When it costs higher to lend, businesses won’t borrow, and it will decrease the aggregated demand in the economy, starting a slow growth.

  • Borrowing gets more expensive
  • Economic growth slows down due to people not spending money
  • People will put their savings into savings accounts or bonds rather than stocks because it is easier to generate income without much risk
  • Buying a house gets extremely expensive, slowing down one of the most crucial parts of a working economy, housing

Stocks Gets Less Attractive & Bond Values Decreases

Investing in stocks gets riskier when there is a good return without much risk on various assets. That’s why many investors choose to opt for other options since stocks lose their appeal when investors can earn greater interest rates on bank savings. In essence, investors can achieve the same returns on their capital with less risk. As a result, some investors liquidate a portion of their holdings and transfer the proceeds to money market accounts, CDs, and bonds.

Are Existing Debts Affected?

Increasing interest rates is only for new interest rates. This means they only apply to the newly borrowed debts, not the existing ones. This is the tricky party of rising interest rates, and that’s why they are extremely unpredictable. N no government announces beforehand that they will raise the interest rates.

Can Interest Rates Go Down Again?

The Federal Reserve has been increasing the interest rates continuously for several months, and they will keep on rising for a while. When the interest rates rise, the systems try to get used to that to ensure that everything works smoothly. However, this accommodation to the current situation is not permanent. They are ready to change it according to the given situation.

What is the Future Outlook?

When it comes to interest rates, it is hard to guess what is going to happen due to their unprecedented nature of it. No one from the government will give a hint as to what the future plans are. In addition, because the economic situations always change, it puts another problem in guessing it. You have to understand the most basic pillars of the current situation and track the statistics and data to see where it’s going.

Short-Term Interest Rates Will Keep Rising

The vast majority of economists and other professionals believe that short-term interest rates will keep increasing as it has been since the middle of 2022. Although not as swiftly, long-term rates will likely increase as well. In particular, in 2023, the Federal Reserve will likely keep raising short-term rates. The Fed wants to bring inflation back down to a healthy level because they view it as a serious threat. As a result, they’ll probably boost rates until inflation is in check. Since 2016, short-term rates have been below 4%. Many analysts predict that they will rise to 5–6% or more during the next year or two.

What About the Long-Term Interest Rates?

Long-term interest rates will increase, but how much will depend on how well the economy is doing. Many experts predict that they will increase to at least 5–1/2%. Experts anticipate a sharp increase in long-term rates if the economy keeps improving. However, long-term rates will likely remain low or decrease if the economy deteriorates.

Will the Economy Get Better or Go Bottom?

Over the coming few years, many experts anticipate that the economy will expand at a solid rate. Others anticipate a bust that would trigger a recession. The state of the business and consumer sectors is what differentiates these two points of view. Many experts are expecting a strong performance from the stock market and economy if corporate confidence keeps rising.

The Verdict

To conclude, interest rates are not favorable for many. Because they make everything more expensive for everyone. That’s why both businesses and individuals always want to avoid high-interest rate environments since it makes life harder. It’s bad for countries’ economies as well, as it slows down spending on everything, and businesses could go bankrupt because of this. The current state of the world economy is not going well, and governments — including the Federal Reserve — are trying to reverse that by taking back the excess money they printed during the pandemic. This will take some time, and the future is unstable since governments never say what they will do with the interest rates.

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A writer who is passionate about startups and business that focuses on informing people about these subjects. Also publishes on decentfinancelife.com

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Atahan Aslan

A writer who is passionate about startups and business that focuses on informing people about these subjects. Also publishes on decentfinancelife.com