• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

The College Investor

Student Loans, Investing, Building Wealth

  • About
  • Podcasts
  • Research
  • Contact
  • Save For College
      • How To Start

      • How To Save For College
      • How To Pay For College
      • What Is the Average Cost of College?
      • What Is A 529 Plan and Where to Open One in Your State
      • How Much Should You Have In A 529 Plan By Age
      • How To Use A 529 Plan For Private Elementary And High School
      • What Are Qualified Expenses For A 529 Plan (And What Doesn’t Count)?
      • The Best Brokers To Open A 529 Plan
      • Tools + Accounts

      • 529 Plans: The Ultimate College Savings Plan
      • 529 Plan Contribution Limits
      • Prepaid Tuition Plans | What To Know
      • Understanding And Using 529A ABLE Accounts
      • Using A Roth IRA To Save And Pay For College
      • FAFSA Deadlines for Financial Aid
      • CollegeBacker Review
      • Upromise Review
      • UNest Review
      • Other Options

      • Student Loan And Financial Aid Programs By State
      • The Guide To Military And VA Education Benefits
      • How To Fill Out The FAFSA
      • How To Find College Scholarships
      • The Best College Scholarship Search Websites
      • How To Find Grants To Pay For College
      • Pell Grants: What They Are And How To Qualify
      • Understanding Federal Work-Study
      • How To Use A 529 Plan If Your Child Doesn’t Go To College
  • Student Loans
      • Borrowing

        • How Student Loans Work
        • How To Apply For A Student Loan
        • Best Student Loans And Rates In April 2023
        • 10 Best Private Student Loans Of April 2023
        • Best Student Loans To Pay For Graduate School
        • Best Student Loans To Pay For Medical School
        • Parent Loans To Pay For College
        • No-Cosigner Student Loan Options
        • Guide To Income Sharing Agreements (ISAs)
        • Best International Student Loans
      • Get Out Of Debt

        • Best Student Loan Refinance Companies In April 2023
        • Best Student Loan Repayment Plans
        • Best Student Loan Refinancing Bonuses And Promotional Offers Of April 2023
        • Student Loan Forgiveness Programs (The Complete List)
        • The Full List Of Student Loan Forgiveness Programs By State
        • Public Service Loan Forgiveness (PSLF)
        • Top Student Loan Scams
        • Average Student Loan Monthly Payment
        • Average Student Loan Debt By Year
      • Reviews

        • Credible Review
        • Splash Review
        • Ascent Review
        • Citizens Bank Review
        • Commonbond Review
        • Earnest Review
        • ELFI Review
        • Laurel Road Review
        • LendKey Review
        • SoFi Review
  • Investing
      • How To Start

        • How To Start Investing in High School
        • How To Start Investing In College
        • How To Start Investing In Your Twenties For 22 – 29 Year Olds
        • How To Start Investing In Your 30s For 30 – 39 Year Olds
        • How To Start Investing With $100 Or Less
        • How To Give Kids The Gift Of Stock
        • What Is Dividend Growth Investing
        • IRA Rollover Chart
      • Tools + Accounts

        • Best Online Stock Brokers
        • The Best Traditional And Roth IRA Accounts
        • The Best Robo-Advisors
        • The Best Investing Apps
        • The Best Places to Trade Options
        • The Best Places To Open A Health Savings Account
        • The Best Solo 401k Providers
        • The Best Self-Directed IRA Providers Of 2023
        • Best Cryptocurrency Exchanges
      • Reviews

        • Vanguard Review
        • Fidelity Review 2023
        • M1 Finance Review
        • TD Ameritrade Review 2023
        • Charles Schwab Review
        • Robinhood Review
        • Webull Review
        • Betterment Review 2023
        • Wealthfront Review
  • Earn More Money
      • Extra Income

        • 20 Best Side Hustles You Can Start Earning With In 2023
        • 54 Side Hustle Ideas To Make Money Fast In 2023
        • 100 Ways To Make Money In College In 2023
        • 80 Ways To Make Money From Home In 2023
        • 5 Quick Money Making Ideas (That Take Less Than 1 Hour)
        • 10 Interesting Ways You Can Make Money Driving
        • High-Paying Side Gigs That Earn $1,000 or More Per Month
        • The 10 Best Money-Making Apps
        • Paid Surveys: Earn Money For Giving Your Opinion Online
        • 10 Crazy Ways To Make $10,000 You’ve Never Heard Of
      • Build Wealth

        • 40 Best Passive Income Ideas To Build Wealth In 2023
        • 3 Ways To Make $50,000 Per Year Without Working With Passive Income
        • How To Become A Real Estate Investor With Just $500
        • 15 Best Online Business Ideas
        • Residual Income: 7 Super Smart Ways to Build It
        • The Most Common Multiple Income Streams
        • How To Become A Real Estate Mogul With Only $10,000
      • Reviews

        • Fundrise Review
        • RealtyMogul Review
        • FarmTogether Review
        • AcreTrader Review
        • Swagbucks Review
        • Survey Junkie Review
        • TopCashback Review
        • DoorDash Review
  • Personal Finance
      • Banking

        • 10 Best High Yield Savings Accounts Of April 2023
        • 10 Best Money Market Accounts Of April 2023
        • 10 Best Free Checking Accounts In April 2023
        • Best Bank CD Rates Of April 2023
        • 10 Best Business Checking Accounts In April 2023
        • Best Online Banks Of April 2023
        • Best Credit Unions Nationwide Of April 2023
        • Best College Student Checking Accounts Of April 2023
      • Insurance

        • Best Life Insurance Companies
        • Renters Insurance
        • Car Insurance
        • Pet Insurance
        • Umbrella Insurance
        • Disability Insurance
        • Tuition Insurance
        • Travel Insurance
      • Credit Tools

        • Best Budgeting Apps
        • Cash Advance Apps
        • How To Get A Free Credit Score Report
        • Best Credit Monitoring Services For 2023
        • Debt Settlement: Inside The Secret World
        • Credit Repair Explained: Should You Pay For Help?
        • Best Personal Loan Companies And Lenders
        • Online Loan Companies To Borrow From Home
      • Tax

        • Best Tax Software
        • Free Tax Software
        • IRS Tax Refund Calendar
        • Common IRS Questions and Errors
        • Federal Tax Brackets
        • Capital Gains Tax Brackets
        • 401k Contribution Limits
        • IRA Contribution Limits
        • HSA Contribution Limits
  • Awards
  • Search
Home » Investing » Why Does It Matter If The Fed Raises Interest Rates?

Why Does It Matter If The Fed Raises Interest Rates?

Updated: February 19, 2023 By Robert Farrington

At The College Investor, we want to help you navigate your finances. To do this, many or all of the products featured here may be from our partners. This doesn’t influence our evaluations or reviews. Our opinions are our own. Any investing information provided on this page is for educational purposes only. The College Investor does not offer investment advisor or brokerage services, nor does it recommend buying or selling particular stocks, securities, or other investments. Learn more here.Advertiser Disclosure

There are thousands of financial products and services out there, and we believe in helping you understand which is best for you, how it works, and will it actually help you achieve your financial goals. We're proud of our content and guidance, and the information we provide is objective, independent, and free.

But we do have to make money to pay our team and keep this website running! Our partners compensate us. TheCollegeInvestor.com has an advertising relationship with some or all of the offers included on this page, which may impact how, where, and in what order products and services may appear. The College Investor does not include all companies or offers available in the marketplace. And our partners can never pay us to guarantee favorable reviews (or even pay for a review of their product to begin with).

For more information and a complete list of our advertising partners, please check out our full Advertising Disclosure. TheCollegeInvestor.com strives to keep its information accurate and up to date. The information in our reviews could be different from what you find when visiting a financial institution, service provider or a specific product's website. All products and services are presented without warranty.

fed raises interest rates

The Federal Reserve Bank (Fed) uses a variety of tools to manipulate unemployment, inflation and other economic cycles.

But of all the financial instruments at its disposal, the Fed's ability to raise or lower interest rate levels may be the most influential. And it's certainly the Fed monetary policy that's the most discussed by the media and public at large.

The Federal Funds Rate was at near zero in March 2020 when the Covid-pandemic and widespread lockdowns first began to cause a financial crisis. Now, the Fed has been raising interest rates for the last year, and while the rate increases are potentially slowing, they're not stopping. But that could change depending on how the economy fares in the proceeding months.

Why does it matter if the Fed raises interest rates? How could it affect inflation, saving account interest rates, mortgages, and other types of financial products? Here's what you need to know.

Promo: Simplifi. Simplifi is a budgeting and net worth tracking app that can help you get started managing your money better. Start your free 30-day trial, then get 25% off an annual subscription. Try it today! >>

Table of Contents
Understanding Economic Cycles
The History Of The Fed
The Fed's Role
Why The Fed Raises Or Lowers Rates
Is The Economy Ready For a Higher Fed Rate?
Potential Impacts If The Fed Raises Interest Rates
Final Thoughts

Understanding Economic Cycles

Economies are subject to boom and bust cycles. Economies grow and grow until an event happens, which triggers a bust, and then the cycle repeats. These can be mild or severe, as was the case in 2007/2008 with the Great Financial Crisis (GFC). To understand why it matters if the Fed raises interest rates, let’s first look at what causes economies to expand and contract.

An expanding economy is one that is growing. In an expanding economy, jobs are being added (unemployment is decreasing), people are spending, and GDP is increasing. At some point, the economy inevitably peaks and growth begins to slow. Slowing growth doesn’t mean the economy has gone into reverse. It means that there's still growth, but the rate of change from month to month or quarter to quarter is decreasing.

When an economy peaks, consumers have reached their maximum spending and GDP is essentially flat. The economy is no longer expanding. Within the economy, businesses will likely have raised prices as much as possible (i.e., demand has leveled off). And as consumer demand begins to decline due to high prices, prices will eventually decline as well.

At the same time, businesses may start laying off employees because of a lack of demand. During this phase, the economy is said to be in a contraction and potentially going into recession. Eventually, the economy will bottom (i.e., trough) and then begin expanding again.

These cycles are normal for any economy. However, cycles can overshoot, which leads to very high inflation. On the flip side, they can undershoot which leads to a recession or even depression.

The History Of The Fed

The United States didn’t always have a Federal Reserve Bank. Before 1913, the reluctance to create a central bank was due to fear of consolidated power. Instead of a central bank, cities had bank associations called clearinghouses. Also, the country was on the National Banking System from 1863-1913, which was a decentralized coalition of banks.

But the economy has experienced significant stock market panics throughout the United States history, sometimes followed by economic busts. Some notable stock market panics that led to a decline in economic activity or even a recession were the panics of 1819, 1837, 1857, 1873, and 1893.

The straw that broke the camel’s back was the panic of 1907. During that year, The Knickerbocker Trust Company went bankrupt. Panic ensued as bank runs spread across the country. However, people weren’t able to withdraw their savings because banks didn’t have any money.

During this period, the stock market fell 50% from its peak. There wasn’t a depression following the panic. But some businesses were liquidated. The stock market had recovered nearly all of its loss one year later. It was JP Morgan who led the financial system back to stability.

However, the country knew it could not depend on a wealthy financier every time there was a panic. This led to the creation of the Federal Reserve in 1913. It was composed of 12 Federal Reserve banks and meant to counter the ups and downs of the economy while also limiting inflation.

The Fed's Role

Since 1977, the Federal Reserve has operated under a dual mandate from Congress. It is charged with promoting maximum employment and stable prices (i.e. controlling inflation).

How has the Fed done its job? Well, we did have the Great Depression in the early 1930s. But to its credit, the Fed was successful in clamping down on runaway inflation in the late 1970s. Many say the Fed saved the U.S. financial system from collapse during the Great Financial Crisis (GFC). 

Starting with the GFC, we see the Fed using quantitative easing for virtually every economic crisis going forward. And, yes, that certainly includes the coronavirus crisis that the U.S. (and the world) is currently in the midst of.

Why The Fed Raises Or Lowers Rates

When the economy is overheating, the Fed raises interest rates to slow it down. An overheating economy is at full employment, experiencing increasing inflation and growing GDP.

One of the key factors in an overheating economy is easy credit. If credit is too loose, people and business can spend money easily. And that means businesses and individuals are often tempted to take on too much debt. Inflation can get out of control as well - when there's a lot of money floating around, prices rise because everyone knows they can charge more (due to all the money floating around). 

When the Fed raises interest rates, borrowing slows down (because it's more expensive to borrow). This trickles into the economy as credit contracts. It also has the effect of reducing inflation. Less spending means companies will be forced to stop raising prices, or in some cases lower prices to compete.

Increasing interest rates leads to a slowing economy but it can also result in a recession.

On the other side of the coin, the Fed will lower interest rates to stimulate economic growth. Reduced interest rates expand credit as businesses can borrow at lower rates.

Related: The Best Small Business Loans To Build Your Company

Is The Economy Ready For a Higher Fed Rate?

There’s a lot of debate if the economy is strong and can maintain its growth or fragile.

Inflation is at all-time highs and the unemployment rate is near all-time lows. The Fed has been raising rates for a year, and now we're seeing the "extra" money being pumped out of the economy through higher mortgage rates and borrowing rates. 

But at the same time, consumer spending doesn't seem to be slowing down much. The Fed seems to be stuck between a rock and a hard place.

Potential Impacts If The Fed Raises Interest Rates

In the current economy, what could raising rates mean for businesses and individuals? First, raising interest rates will curtail lending. As previously mentioned, a decline in lending can also start to slow down an economy.

Mortgage rates are higher today than they've been - but they're not much higher than they were near 2008 Great Financial Crisis. And they're well below the peak they saw in the 1980s.

Raising interest rates will increase mortgage rates and slow the rate of increase in house prices (hopefully). But housing also has a huge supply problem - there simply aren't enough houses to meet demand, so that may keep prices high even in a rising rate environment. 

Looking at the other side of the rate-raising argument, inflation is still high. When the Fed raises rates, inflation tends to slow down since borrowing declines. And when fewer individuals and businesses are receiving financing, this works to reduce the amount of money being injected into the economy.

When the annual inflation rate is lower than the average wage increase, the cost-of-living becomes more affordable. And that makes it easier for individuals and families to cover their core needs as well as save up for future goals. 

Speaking of saving, a higher Federal Funds Rates will also mean higher interest rates on savings accounts and certificates of deposit (CDs). Before the pandemic, it wasn't unusual for some high-yield savings accounts to offer APYs above 2%. Now, we're seeing savings accounts over 4%.

Final Thoughts

So what will the Fed do? The general consensus is that it will continue to raise rates, but at a slower pace than it has been.

Ultimately, the Fed's decision to raise rates or leave them alone will mainly depend on where unemployment and the economy are at the time. If the economy is still strong and inflation isn't waning, rate hikes will continue. But if growth has gone into reverse by then, it's likely that the Fed's bond-buying program will return and rates will decline.

Robert Farrington
Robert Farrington

Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.

He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.

He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.

Editor: Clint Proctor Reviewed by: Claire Tak

Editorial Disclaimer: Opinions expressed here are author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, or other advertiser and have not been reviewed, approved or otherwise endorsed by any of these entities.
Comment Policy: We invite readers to respond with questions or comments. Comments may be held for moderation and are subject to approval. Comments are solely the opinions of their authors'. The responses in the comments below are not provided or commissioned by any advertiser. Responses have not been reviewed, approved or otherwise endorsed by any company. It is not anyone's responsibility to ensure all posts and/or questions are answered.
Subscribe
Connect with
I allow to create an account
When you login first time using a Social Login button, we collect your account public profile information shared by Social Login provider, based on your privacy settings. We also get your email address to automatically create an account for you in our website. Once your account is created, you'll be logged-in to this account.
DisagreeAgree
Notify of

I allow to create an account
When you login first time using a Social Login button, we collect your account public profile information shared by Social Login provider, based on your privacy settings. We also get your email address to automatically create an account for you in our website. Once your account is created, you'll be logged-in to this account.
DisagreeAgree

0 Comments
Inline Feedbacks
View all comments

Primary Sidebar

Robert Farrington will teach you how to get out of student loan debt and how to start investing.

Hi! My Name is

America's Millennial Money Expert

Welcome to The College Investor. We're here to help you escape student loan debt so you can start investing and building wealth for the future

Our expert guides, reviews, and more are designed to help you achieve your financial goals.

Want to learn more? See what's in my wallet.

As Featured In

Social Media

Popular Posts

Side Hustle Ideas

54 Side Hustle Ideas To Make Money Fast In 2023

Best Side Hustles

20 Best Side Hustles You Can Start Earning With In 2023

Crazy Ways To Make $10,000

10 Crazy Ways To Make $10,000 You’ve Never Heard Of

Make $50,000 Per Year

3 Ways To Make $50,000 Per Year Without Working With Passive Income

Student Loan Scams

Top Student Loan Scams

Net Worth of Millennials

Average Net Worth Of Millennials By Age

Ways To Get Student Loan Forgiveness

Student Loan Forgiveness Programs (The Complete List)

529 Plan By Age

How Much Should You Have In A 529 Plan By Age

Passive Income Ideas

40 Best Passive Income Ideas To Build Wealth In 2023

Make Money From Home

80 Ways To Make Money From Home In 2023

Ultimate Guides

529 Plan Guide

529 Plans: The Ultimate Guide To College Savings Plans

Student Loans and Financial Aid By State

Student Loan And Financial Aid Programs By State

Student Loan Advice

The Definitive Guide To Student Loan Debt

Student Loan Forgiveness By State

The Full List Of Student Loan Forgiveness Programs By State

newretirement

How to Start Saving Now: The College Graduate’s Guide to Saving for Retirement

Latest Research

How much to file taxes

Tax Survey: How Much People Paid To File And The No.1 Tax Software They Used

Inflation survey

Side-Hustles To The Rescue: Survey Shows 86% Stressed About Money & Inflation

students choose to work survey

75% Of Students Would Still Choose To Work Even If They Didn’t Have To

Institutional Merit Grants

Who Gets Institutional Merit Grants At Private Colleges?

Resume Student Loan Payments

Survey: Even With Higher Expenses, Most Student Loan Borrowers Are Ready To Resume Payments

Footer

Who We Are

The College Investor is an independent, advertising-supported financial media publisher, focusing on news, product reviews, and comparisons.

Connect

  • Contact Us
  • Advertise
  • Press & Media

About

  • About
  • Our Team
  • Podcast
  • Editorial Guidelines
  • How We Make Money
  • Archives

Social

Copyright © 2023 · The College Investor · Privacy Policy ·Terms of Service · DO NOT Sell My Personal Information

wpDiscuz