The Pros and Cons of Rising Interest Rates (2024)

FAQs

The Pros and Cons of Rising Interest Rates? ›

The downside of higher interest rates is that they tend to hurt most other types of investments, particularly stocks. The idea behind raising interest rates is that it can help slow down inflation by putting a damper on the market. But slower economic growth usually leads to challenging market conditions.

Key Takeaways

This encourages consumer and business spending and investment and can boost stock prices. Lower rates can also lead to inflation, which undermines the effectiveness of low rates. Higher rates discourage spending and can depress company returns and, therefore, stock prices.

Higher interest rates increase the return on savings. They also make the cost of borrowing more expensive. Higher interest rates help to slow down price rises (inflation).

With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.

Whenever the Federal Reserve lifts rates to battle high inflation, the risk of a recession increases, and the US economy has typically fallen into an economic downturn under the weight of rising borrowing costs.

Higher interest rates can benefit savers looking to grow their funds, as it gives them more potential to grow their money. On the flip side, those looking to borrow will find higher rates less desirable, as the cost of borrowing increases, meaning borrowers end up paying more back over time.

Who benefits and who is hurt when interest rates​ rise? Corporations with immediate capital construction needs are worse off. Households with little debt, saving a significant fraction of annual income for retirement, are better off. The federal government running persistent budget deficit is worse off.

Interest rates and bank profitability are connected, with banks benefiting from higher interest rates. When interest rates are higher, banks make more money by taking advantage of the greater spread between the interest they pay to their customers and the profits they earn by investing.

How does the Fed control inflation? The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down.

On the positive side, higher interest rates can benefit savers as banks increase yields to attract more deposits.

How to get rich when interest rates are high? ›

Higher interest rates have boosted banks' net interest income—resulting in higher net interest margins (NIMs) and enhanced profitability. Lenders have benefited from a widening of the spread between the interest they pay to depositors, and the income they reap on lending.

The Fed raises interest rates to slow the amount of money circulating through the economy and drive down aggregate demand. With higher interest rates, there will be lower demand for goods and services, and the prices for those goods and services should fall.

As high interest rates slow economic activity by dampening overall demand for goods and services, both businesses and consumers will face weaker economic prospects in 2024. High interest rates mean economies, businesses and consumers will have to pay more to borrow and adjust to the new financing conditions.

The Great Depression of 1929–39

Encyclopædia Britannica, Inc. This was the worst financial and economic disaster of the 20th century. Many believe that the Great Depression was triggered by the Wall Street crash of 1929 and later exacerbated by the poor policy decisions of the U.S. government.

The S&P 500 rallied in the first half of 2024 as investors cheered resilient earnings growth and anticipated that aggressive Fed rate cuts were just around the corner. However, the New York Fed's recession probability model suggests there is still a 61.8% chance of a U.S. recession sometime in the next 12 months.

Key Takeaways. Interest rates and bank profitability are connected, with banks benefiting from higher interest rates. When interest rates are higher, banks make more money by taking advantage of the greater spread between the interest they pay to their customers and the profits they earn by investing.

The winners. Unsurprisingly, bond buyers, lenders, and savers all benefit from higher rates in the early days.

Interest rate risk is the potential that a change in overall interest rates will reduce the value of a bond or other fixed-rate investment: As interest rates rise bond prices fall, and vice versa. This means that the market price of existing bonds drops to offset the more attractive rates of new bond issues.

When interest rates rise, the cost of the money you borrow is higher: you may pay higher interest rates on new loans and potentially be able to borrow less than before. The impact on your existing loans may also vary depending on whether you have a fixed-or variable-rate loan.