what's the benefit of higher interest rates

By now, you’ve undoubtedly heard that “the Fed” has been raising interest rates to control inflation. Interest rates are an essential part of our economy, and their impact can be felt by nearly everyone. The Federal Reserve raises interest rates to restrict access to funds and hopefully slow down the rate of increase of prices, including wages, in the economy. While this sounds like an awful idea if you are a borrower or have used access to cheap money to grow your business. There are benefits to higher interest rates for savers and lenders.

Grow savings faster

If you are a saver, higher interest rates mean you can earn more money on your savings. This can be really helpful if you are saving for a specific goal, such as buying a house, starting a business, or saving for retirement. With these interest rates, your savings will grow at a faster rate, allowing you to reach your financial goals sooner.

Combat inflation

Another advantage of higher interest rates for savers is that they can help to combat inflation. Inflation is the rise in the cost of goods and services over time, and it can erode the value of your savings. In other words, if the prices of the goods you buy rise faster than the value of your savings, your savings can’t buy as much. However, if you are earning more interest on your savings, you can offset the effects of inflation and maintain the purchasing power of your money.

More money for lenders

For lenders, higher interest rates mean that they can earn more money on the loans they provide. This can be particularly beneficial for banks and other financial institutions that make a significant portion of their revenue from interest on loans. Increased interest rates can also encourage more lending, as lenders are more likely to provide loans when they can earn a higher return on their investment.
And, when you purchase a bond, whether a government bond or corporate bond, you also become a lender and can benefit from these increased interest rates. Retirees and others who live on fixed incomes are often savers and lenders —a large part of their income is often the interest generated from savings deposits and bond interest.
After nearly a decade of extremely low interest rates, these new higher interest rates are a real boon to those living on fixed incomes.

Stabilize the economy

Another advantage of increased interest rates for lenders is that they can help to stabilize the economy. When interest rates are low, borrowing becomes cheaper, and consumers and businesses are more likely to take on debt. However, this can lead to an increase in inflation, a potential economic bubble, and, in some cases, poor management decisions. Low interest rates can allow a company that is either poorly run or may not have an economically feasible business model to continue operations simply by borrowing cheap money. By raising interest rates, lenders can discourage excessive borrowing and prevent an economic crisis.
Higher interest rates will have a different effect on savers and lenders versus borrowers. Savers can earn more money on their savings, combat inflation, and reach their financial goals faster. Lenders can earn more money on loans, stabilize the economy, and prevent potential economic crises. While borrowers may have to curtail spending to accommodate the higher cost associated with borrowing, the benefits for savers and lenders are significant. 

Blog posts and newsletter articles are not individualized advice. They are intended to be thought-provoking and to surface discussion topics for your financial planning.

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