Did you know that even the slightest tweak in the interest rates impacts many aspects of your daily living?
Well, it’s true. Interest rates directly affect consumer behavior and purchasing power. How, you ask? Here’s the thing: as soon as interest rates increase, borrowing becomes more expensive which results in dampening consumer spending. But there’s good news too! With higher interest rates, consumers get a window of opportunity to earn more on their deposit accounts.
In this article, we shall talk about one such important interest rate: FED Interest rates! But why are FED interest rates so important? In a nutshell, the federal funds rate is significant because it is directly linked to and moves in lockstep with many other domestic and foreign rates.
1. The Cost Of Loans Shoot Up
If interest rates still don’t concern you know that in the case of a variable rate, the interest rates on your existing credit products may shoot up and affect your financial planning.
For instance, a majority of housing loans offer variable interest rates. To explain to you in simpler terms: you’ll have to pay extra interest on your housing loan when the interest rate goes up. In addition to this, after the increase in FED interest rates, if you are not prepared, you may have to put off purchasing your ideal home.
The good thing is that your payments will not alter if you have a fixed-rate loan. But given the uncertainty, most of the mortgages now refrain from offering a fixed rate.
2. Earn A Better Interest Rate On Your Deposits
So, what can families expect from this FED interest rate hike?
If your family has ample amounts of savings, you may expect to earn a higher interest rate in a well-functioning market.
Since FED rates affect the interest rates offered by an array of banks, large banks may be quick to boost interest rates on borrowers and slower to pay higher rates to their depositors. Long story short: if you have money saved up, you should check into banks that may be able to offer you better rates.
3. A Potential Downturn in Consumer Spending
No matter how redundant the phrase ‘History repeats itself’ sounds, it holds true in most of the cases, particularly, in the situation at hand. Let us explain to you!
History is the testimony to the fact that any significant increase in borrowing costs has had a negative impact on overall consumer expenditure. As personal and business loans become more expensive and savings become more attractive, business may hold back their expansion plans leading to a downfall in new product offers. As this happens, consumers think twice before making any impulsive purchase.
During the financial crisis of 2008, the interest rate was effectively zero, and it was again the case in 2020 to combat the pandemic.
Now, it’s been two years (March 2020 – March 2022) since the FED announced its first interest rate hike to combat the highest inflation rate in 40 years. This clearly means that the consumers can expect the borrowing costs to increase as well- all of which leads to the three major impacts that we have discussed in this article.
To your relief, now that you are familiar with the expectations from this hike in the FED interest rate, you can prepare better than your peers! So, it’s time to better your finances so that it doesn’t affect you in any adverse way.
This article is brought to you by Standard Chartered Bank (Singapore) Limited. All information provided is for informational purposes only.