The Fed should raise interest rates. What does it mean?
The Fed is expected to raise interest rates, but we don’t yet know how big that increase will be. What will a raise mean for you?
HUNTSVILLE, Ala. – The mere mention of the words “raised” and “rate” in the same sentence can raise blood pressure for many people, but the decision to raise interest rates is not made on a whim.
It is in fact a monetary tool to fight against inflation, a problem that we face on a daily basis.
And speaking of inflation, you can’t turn on the TV without hearing about it and you can’t leave the house without feeling the effects.
“Obviously, this is a problem that the Federal Reserve has announced it wants – it wants to solve it,” said the associate dean of the UAH College of Business, Dr. Wafa Hakim Orman.
One of the ways the Federal Reserve has dealt with inflation in the past has been to raise interest rates nationwide. But what are interest rates?
“That’s about the price you pay to borrow money, okay. So that’s the price of borrowing,” Orman said.
This is how monetary policy unfolds, ultimately leading to a leveling of inflation.
“What they want to do is gradually reduce the amount of money in circulation and make it a little more difficult for people to borrow, to spend. So it’s at least a little more expensive for people to borrow and the hope is that by doing so, it encourages people to borrow less, spend a little less, save a little more, and it drives prices down,” Orman said.
So what does this mean for everyday life?
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“Expect all those [mortgage, auto loan, business loan, etc.] prices go up a bit. Now the Federal Reserve announced in December that it was going to raise interest rates in 2022. Much of that has been priced in, so mortgage rates have actually been rising slowly because banks are s ‘fully expected it because the Fed said it was going to,’ Orman said.
But this rise in interest rates is not entirely bad.
“Well, you should expect to see the interest rate go up on your savings account as well, right? So it goes both ways. borrow but on the other hand you can actually earn more by either leaving money in a savings account or investing it in other things like bonds or anything else that pays interest” , Orman said.
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