When interest rates rise, borrowers have more expenses to cover. That’s because the cost of borrowing rises, compounded over time, and can make a home or car purchase more expensive. It can also increase monthly payments for anyone with a mortgage or auto loan, and boost the costs of credit card debt. However, a rate hike can also create more favorable conditions for savers.
For example, money market funds, certificates of deposit (CDs) and savings accounts typically offer higher yields when rates are on the rise. These investments can be a useful hedge against the potential for future price volatility in more risky assets like stocks and bonds.
The Federal Reserve’s rate-setting decisions are not always clear-cut, and often depend on a number of factors. During the 2008 financial crisis, officials cut interest rates to near-zero as an act of insurance to stave off a recession. But they’ve also been known to keep rates high or even hike them aggressively, tolerating a slowdown in the economy to tame inflation.
The Fed appears to be leaning toward the latter option as it faces tepid inflation and moderate economic growth, in part because of concerns about rising tariffs. Some experts worry that a hawkish Fed could over-tighten the economy and trigger a recession.
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