How Does the Rise of Interest Rates Impact the Economy?
And in news about our economy, The Federal Reserve is considering raising interest rates this year. This will exceed the market’s current anticipated changes. The goal is to reduce inflation.
When you hear about inflation, economic recessions, and interest rates, does your head spin? Do you know how these different financial conditions or decisions impact the American economy? Keep reading this plain-English economic discussion.
What Are Interest Rates?
When you borrow money to buy a house, for example, lenders want to make money. So, they charge a percentage of the total amount borrowed.
This percentage, or interest rate, gets added to each payment.
Economy Recession vs. Inflation
A recession is a decline in the Gross Domestic Product (GDP) for two consecutive quarters. The GDP describes how much final users pay for goods or services made in a country for a set time. How does this affect you?
People lose their jobs, so they curb spending. Businesses lose sales, so they lay off workers. Now fewer people have money to spend.
Unexpected economic problems or uncontrolled inflation can start a recession. Inflation means prices go up and the dollar has less buying power. Experts caution us to not think of how much one item cost ten years ago compared to now.
Inflation describes broad measures across industries such as the automotive or energy sector. It reflects the whole country’s buying power of the dollar.
How Do Interest Rates Affect the Economy?
The Federal Reserve Board (we’ll just call them “the Fed”) sets target interest rates (TIR). This defines the interest rate banks use when borrowing or lending money to each other. This is the “federal funds rate” (FFR).
The Fed usually changes the TIR according to current economic activity. So, if the economy is really strong, they’ll raise the rate, and if it’s sluggish, they lower it. This creates a ripple effect across the American economy lasting about 12 months.
If you’re considering taking a mortgage to buy a house, you can take a guarded breath. The short rate raises made by the Fed don’t affect long-term rates for mortgages. But they can still increase due to the current inflation climate.
For example, experts predict that Treasury 10-year yield will peak at 3.5 percent in 2022. Then it will dip back down to 3.0 percent by the end of the year.
Thus, today’s average mortgage rates on 30-year fixed-rate loans will rise from 5.4 to about six percent. A 15-year fixed-rate mortgage will increase from 4.65 to 5.25 percent. Experts say rates may decrease if inflation declines or the economic slowdown continues.
The Economy’s Impact on Real Estate Markets
The real estate market in St. Louis and St. Charles is great for sellers. Most sellers receive offers (even above the asking price) as soon as they list their homes.
This is because there are significantly more buyers than sellers. Also, fewer new homes have been built in the last decade. Home prices are predicted to level out but not decrease.
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