What Would the Benefit of Raising Interest Rates Right Now Be?
At the last meeting, the Federal Open Market Committee determined that it doesn’t plan to raise interest rates until after 2023. Inflation reached a 13-year high of 5% in May, according to the U.S. Labor Department’s Consumer Price Index report. Year-over-year inflation had reached 3% in April.
What’s more, some analysts believe an interest rate increase may happen sooner than forecasted.
“Expect the Fed to soon begin tapering its [quantitative easing] purchases, and to start hiking interest rates earlier than expected — and most importantly much faster than currently priced in markets,” said Bank of America credit strategist Hans Mikkelsen in a note last week.
Why? Because one way to stem inflation is to raise interest rates. The theory is that if your money can earn more interest in the bank, you’re more likely to keep it there rather than spend it.
On the other hand, raising rates too high, says the Council on Foreign Relations, could increase mortgage rates and create increased volatility in the stock market. It would also slow consumer spending, which could slow our recovering economy.
What’s the right answer?
Let’s look at some of the benefits of raising interest rates right now.
The housing market could slow, making it easier for people to buy a home. It’s undoubtedly a seller’s market right now, with many people finding themselves locked out of their dream homes by savvy buyers paying cash or by those willing to forego appraisals to hasten closing.
Raising interest rates could slow the housing market and make it easier for some people to buy homes. While mortgage payments could go up because of the interest rates, down payments, calculated as a percent of the home’s selling price, would go down. This could make it easier for some people to buy a home. Additionally, people with excellent credit can still snag low rates, which means their monthly payments could be the same — or lower — than they were before an interest rate hike.
Bank stocks could rise. Those who have invested in U.S. bank stocks such as Bank of America, Wells Fargo and Chase, could see a significant return on their investment, says Motley Fool. Banks earn interest on their loans and securities, which they hold in greater quantities than their liabilities, or deposits and borrowings. Tech stocks have had their day in the sun recently, but those looking to diversify their portfolio may want to consider bank stocks in anticipation of rate hikes over the next few years.
People’s money could go further. Of course, the main impetus behind an interest rate hike would be to slow inflation. As interest rates go up, retirement accounts and other savings will increase without any added investments. Meanwhile, the price of goods and services could be expected to drop. These two factors combined mean people’s money will go further. That would stimulate economic growth while stemming the potential runaway inflation that could leave many people in dire straits.
While an interest rate hike may not be on the immediate horizon based on news from the Fed, gradual increases could help more people get into homes sooner and alleviate some financial concerns regarding retirement and everyday spending.
More From GOBankingRates