In a nutshell
Rising interest rates generally encourage people to save and avoid borrowing. The current cycle of rising interest rates is different from other periods of rising interest rates in the 21st century because of the breadth and speed of the increases.
High prices either drove potential homebuyers out of the market or forced them to look at lower priced housing (if they could find it at all). Companies that use capital to run their operations were forced to cut back due to rising interest rates on bank loans and corporate bonds, but the economy remained strong, especially in the service sector. Rising interest rates had a dramatic effect on the types of investments people made to preserve and expand capital.
stock
Rising interest rates could be negative for some stocks. When interest rates rise, companies' borrowing costs could lead to increased costs of doing business. For companies that issue bonds or rely on bank loans for growth, the interest costs associated with this borrowing could severely hurt profitability unless companies raise their prices enough to offset these additional interest costs. On the other hand, some companies, such as banks, could benefit from rising interest rates. Rising interest rates allow companies to charge more for loans, potentially increasing their profits.
Since the Fed began raising interest rates in March 2022, the stock prices of many companies that relied on cheap financing have fallen, particularly speculative technology companies and startups, as well as banks that invest capital in technology startups and commercial real estate. The prospect of easing inflation at the end of 2023 has convinced some stock market participants that the Fed will cut interest rates repeatedly in 2024, sparking a rise in major indexes such as the Nasdaq, S&P 500 and Dow Jones Industrial Average. Hot technologies such as AI have also boosted stock prices for companies in those sectors.
But inflation hasn't disappeared entirely: As of March 2024, inflation remains above the Fed's 2% target, rekindling stock market volatility and making investors nervous about the possibility of rate cuts or even further hikes in 2024.
Bonds
Bonds are very sensitive to rising interest rates. When interest rates rise, the value of a bond falls because the interest rates of other similar newly issued bonds rise while the coupon payments remain the same. To entice bond investors to buy existing bonds with lower coupon payments, the bond price must fall to match the interest rates of the newly issued bonds.
Bond mutual funds and bond ETFs had their worst year in decades and possibly the worst year ever, as rising interest rates caused the value of their assets to fall. Many funds rose at the end of 2023, but the gains stopped in the first quarter of 2024 as inflation leveled off. The upside of a prolonged period of rising interest rates is that these funds' yields will continue to improve as the economy digests the higher cost of funds. Additionally, short-term bond yields, whether government or corporate, are at their highest in decades. With the TINA (no other choice) era of stocks coming to an end, bond laddering strategies have come back from obscurity.
credit card
Credit card interest rates track with the Fed's rate hikes. That's because credit card interest rates are typically tied to the prime rate, which is affected by the federal funds rate. According to the Consumer Financial Protection Bureau (CFPB), since the Fed began raising interest rates in 2022, the average annual rate for people with credit card balances has risen from 16.3% to 22.8%.
This may be a good time to consider a balance transfer offer that offers a low interest rate for a period of time, and it can also be a great incentive to focus on paying off this debt as quickly as possible.
Housing loan
According to the Federal Reserve Bank of St. Louis, the average 30-year fixed-rate loan will reach a century high of 7.63% in November 2023. This is a staggering increase from the all-time low of 2.67% on the final day of 2020. Rising mortgage rates directly increase the price that homebuyers must be willing and able to pay. On the other side of the transaction, sellers may be forced to lower their asking price in order to sell their home. As a result, people who were able to buy homes at the end of 2020 are now locked into ultra-low mortgage rates, while new homebuyers are often locked out of an increasingly expensive housing market.
Rising mortgage rates due to rising interest rates, combined with rising inflation, are putting a damper on a housing market that has been extremely hot for the past few years. It is forcing sellers to reconsider their asking prices, and some may decide not to sell after all. On the bright side, rising prices and increased demand are helping to revive homebuilding activity, with housing starts beginning to recover from their post-pandemic slump.
Regular savings account
Rising interest rates are good for people with savings accounts and other interest-bearing savings accounts. Banks typically raise the interest they pay on deposits when the Fed raises interest rates. These accounts are one way banks raise money and lend it out. Interest rates on loans are usually higher than interest rates on savings accounts, so banks make money on the spread.
Unfortunately, if you're saving in a savings account with a suboptimal APY, your bank may not increase your savings interest rate on its own. Savers looking for the best interest rates should consider looking at online banks and financial institutions, as they generally offer higher interest rates and often respond more quickly to interest rate changes than brick-and-mortar banks.
AP Byline Roundup: Fighting Inflation Amid Robust Economy
The Federal Reserve is raising interest rates to fight inflation while simultaneously trying to avoid a recession. So far, the central bank appears to have been successful in achieving this “soft landing,” which has benefited savers and investors alike. The key is to keep a close eye on financial developments and prepare for the next phase of this interest rate cycle.