How Higher Interest Rates Can Affect You

The Federal Reserve’s long-overdue interest rate hike has finally happened last December 2016. Most market participants were able to anticipate it and thus the stock market was at a standstill.

With only 0.25% was added to the then interest rate, many were unruffled. However, this nonchalance will not be for long. The Federal Open Market Committee or FOMC, the Fed’s interest-rate setting panel, has indicated that three more rate hikes will come in the course of three years. This means that by the end of 2019, interest rates can go as high as 2.75%-3.00%. This is not something that market participants can brush off.

In order for you to prepare for this impending hike, we’ve listed down the different effects of higher interest rates so you can go ahead and prepare for it. Read on to know what they are.

1. Stronger Dollar

Higher rates means a stronger dollar. A higher interest rate means that investors are more likely to go to US banks with their investments as they will yield, naturally, higher returns. This strengthens the dollar and thus increasing imports. The lower aggregate demand also adds to the stronger dollar. With a stronger dollar, traders should consider US companies.

2. Costly Borrowing

Obviously, interests on borrowed money are more expensive. The overall effect of this is lower lending volume. Because borrowers have to pay more, there are less disposable income. The purchasing power of the people decreases as well. All in all, this means that money will be tighter for the common folks.

3. Possible Higher Taxation

For governments who are paying debt, the cost of it becomes higher because of the hiked interest rates. If the government is unable to sustain the debt payment under the higher interest rates, they have the option to increase taxation.

4. More Saving, Less Spending

The appeal of higher returns usually encourage people to save and deposit more. By doing this, spending is effectively lowered. This could be disastrous for the consumer industry. Furthermore, a thrifty buyer could potentially lower sales thus creating a lackluster economic growth.

5. Lower Confidence

Because there is bigger risk in spending and investing on businesses, market participants have generally lower confidence. Again, this will affect the consumer industry and investments. This could potentially lead to negative effects that must be checked.

While higher interest rates have the potential to be disastrous, it is also an opportunity for strong growth and better local business performance.