Taking the mystery (and misery) out of increasing interest rates

Published on Jun 14, 2022

Taking the mystery (and misery) out of increasing interest rates

Practically everything you want to buy costs exponentially more than it did even a few months ago. Americans across the country are struggling to manage rapidly rising costs on everything from grocery store items to gas for their cars. And now the cost of loans and credit cards is also higher than they were in the not-so-distant past. All this can put enormous strain on your personal finances.


Now the federal government has taken action. In an attempt to soothe an unsteady economy, the Federal Reserve decided to raise interest rates. In this article we’ve outlined the reasons behind the action, how it may, eventually, have a positive impact on your ability to make ends meet, and what you can do to handle your own budget.  


The Role of the Federal Reserve

The Federal Reserve (often referred to simply as “the Fed”) is the central banking system of the United States of America. One of its main functions is to control the supply of money. To that end, the Fed has the authority to make interest rate adjustments during periods of spiking inflation. 

Stabilizing prices is an important part of the Fed’s mandate, and the goal is to settle disruptive economic conditions while keeping unemployment low.

The impact of increasing interest rates on credit 

When the Fed increases interest rates, the cost of loans and other credit products becomes more expensive, both for individuals and businesses. The move sparks a jump in the Prime Rate, which is the most commonly used short-term interest rate in the United States. 

Banks offer the Prime Rate to their best customers, so when that interest rate rises, so does the rate those lenders can offer you, the prospective borrower. Therefore, everyone who takes out a loan or uses a credit card and keeps a balance will end up spending more on interest fees.

Raising interest rates is a delicate process, however. If the Fed increases rates too quickly it can hurt consumer demand. The result can be a slower than desired economic recovery, which can lead to higher unemployment.

Why the Fed is taking action now

In January of 2022, the consumer price index soared by 7.5%. It was the fastest gain since February 1982. In an astonishingly short time period, consumers across the country discovered that the prices on all sorts of things they normally bought were higher than they had been just months earlier. Sticker shock was impacting the ability of millions of Americans to pay for everything from essentials to luxuries.

In response, the Fed turned to raising rates as a means to control inflation. The action is intended to slow down the economy by making borrowing more costly. The desired effect is to cool consumer demand until prices stabilize. 

How you can best react

Consider this time an inspiration to reevaluate your own finances so that you can make ends meet today while also preparing for the future:

As a consumer, you have no control over a stores prices, a banks interest rates, or what the Fed does to manage either. The cost of borrowing money will likely remain higher than you prefer until the Fed makes the decision to lower rates. How quickly reductions in the price of goods and services will take is unknown. What you do have is command over the money you earn, spend, save, and borrow.

Looking for more background? Valley offers a variety of resources and information you can access and share with your team today.

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