How Rising Rates Influence Saving and Lending

Blog posted On March 23, 2017

Last week the Federal Open Market Committee (FOMC) voted to raise the benchmark interest rate, a move that will impact the global economy, just not all at once.  In December 2008, the Fed dropped rates to 0 and has taken a gradual approach to raising rates to achieve economic recovery.  This year, the Fed is expected to raise rates two more times.  Here’s what that means for Americans.

Savings accounts will pay savers more.  For years, American savers have earned next to nothing from traditional savings accounts.  When short-term interest rates increase, banks pay higher interest rates to customers with savings accounts.  However, this is a gradual change and will take one to two years for savers to feel the impact. 

For homebuyers seeking mortgage financing, a Federal rate hike influences mortgage rates but will not immediately cause rates to go up.  The Fed mandates the short-term interest rate, not the long-term.  Mortgage rates have risen since the election and rate hike at the end of 2016, but remain low by historic standards. 

Infrastructure spending and economic growth are also influenced by interest rate hikes.  Higher government spending drives up the demand for construction materials, labor force, and other goods and services.  President Trump forecasts 4% annual economic growth and the Fed projects 2% annual growth until 2019.  Depending on hiring, wage growth, and consumer spending, the Fed will have to adjust the pace at which it increases interest rates.  

Higher rates impact the national and international economies, but one rate hike will not change everything overnight.  Increases are passed down to consumers most drastically on short-term lending terms, like credit cards, and have a more gradual impact on long-term lending like mortgage financing. 

Sources: Business Insider, CNNMoney