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Fiscal Investor

Why Interest Rates Matter to You (and Why the Fed Raises Rates)

Interest rates affect your wallet in a big way, especially if you have debt like a mortgage, car loan, or credit card. Lower rates mean you pay less in interest, but higher rates can significantly increase your monthly payments.

The Federal Reserve raises rates to manage the economy, particularly inflation. Inflation happens when prices rise generally, and the Fed wants to slow down excessive spending that can contribute to it. However, inflation can also be caused by factors beyond consumer spending, like supply chain issues.

Let’s look at an example. Say you’re buying a house. At a 2.875% interest rate on a $200,000 loan, your monthly payment for interest would be around $830. With a higher rate of 7.494%, that jumps to $1398 – a difference of $568! This can also affect your credit card payments and car loans.

Higher interest rates can also impact businesses borrowing money to grow. With steeper costs, they might invest less or delay expansion plans.

While higher rates can slow the economy, the Fed might lower them again if they see inflation and economic growth cool down. This is something many people are watching for later in the year.