The Federal Reserve recently raised interest rates for the second time this year, increasing the federal funds rate by a quarter point to a range of 2 to 2.25%. While this modest increase is intended to keep inflation low and stable, higher interest rates can have significant effects on consumers and the broader economy.
For individuals, higher interest rates mean that borrowing money becomes more expensive. When interest rates rise, the costs of mortgages, auto loans, credit cards, and other loans also increase. For someone taking out a new mortgage or car loan, a higher interest rate could add tens or even hundreds of dollars to monthly payments, adding up to thousands of dollars over the life of the loan. Additional interest charges reduce how much of the payment goes toward principal and can delay payoff of the loan.
Higher interest rates also impact credit card spending. As rates rise, the annual percentage rate or APR on credit cards climbs as well. For consumers who routinely carry credit card balances, this means shelling out more each month to cover interest charges. The impacts may be small for modest balances, but sizable for those struggling with significant debt or only making minimum payments. High interest rates make it harder to pay down balances and can perpetuate ongoing debt.
At the broader economic level, increased interest rates can slow lending, especially for big-ticket purchases like homes or vehicles. When interest rates go up, borrowing money becomes more expensive. This can deter people from taking out loans or encourage saving more to pay in cash instead of financing purchases. Slower loan growth translates to fewer home and auto sales, with effects rippling across related industries. It also means less revenue for banks that earn money by charging interest on loans.
However, the impacts on consumers and the economy depend on the overall level of interest rates and how much they increase. Minor or moderate changes may have minimal impacts, especially if income levels are also rising. The Fed closely monitors inflation, employment, GDP growth, and other indicators to determine appropriate interest rate levels. While higher interest rates can restrain an overheating economy and keep inflation stable in the long run, significantly higher rates can also extinguish economic growth and make borrowing money a heavier burden for individuals and businesses. The effects of interest rate changes underscore the complexity of economic policymaking and the far-reaching consequences of the Fed’s decisions.