Rising Interest Rates

Rising Interest Rates

There has been a lot of talk about the most recent rising interest rate trend and the effect that can have on the economy as a whole.  When you hear the term “interest rates,” typically it means the federal funds rate.  The federal funds rate is the rate that banks charge each other to borrow money from one another.  When the interest rate is raised, it makes borrowing money more expensive, which affects how consumers and businesses spend.  This is how the Federal Reserve (“the Fed”) attempts to control inflation through its monetary policies.    

rising interest-ratesAs you can imagine, as the federal funds rate increases, so do interest rates; which typically causes banks to increase the rates they charge their customers to borrow money.  Therefore, a rippling effect occurs and consumers are impacted through increased interest rates on credit cards, mortgages, car loans, etc. leaving households with less disposable income.  When consumers have less discretionary money to spend, it affects businesses’ revenues, and businesses therefore might not borrow as much of the more expensive money to expand operations.  In economics, this is referred to as the aggregate demand production possibilities curve.  When this curve shifts for the worse, this can have a direct negative impact on unemployment and can slow down the economy altogether.  With less money moving around the economy, these factors can be a drag on a company’s profits and the burden may be passed down to their employees through decreased hours, pay cuts, or even worse, being laid off.

Bonds have an inverse relationship to interest rates.  As interest rates go up, bond prices go down.  U.S. Treasury bonds tend to be the most sensitive to interest rate fluctuations because of their high credit quality.  Mortgage rates tend to have a direct relationship with these treasury bonds as well as the monetary policies in place from the Federal Reserve.  While no one knows exactly if interest rates will remain exceedingly low or keep rising, as a consumer it has never been more important to understand these economic changes.  Doing so could help reduce risk exposure, capitalize on foreseeable opportunities, and invest wisely in an ever-changing economic environment.  Now might just be the best time to consider refinancing your home to a historically low rate.  In fact, as rates keep rising, it might be your last chance for many years to come.

Not sure who to call or where to start? Contact me today for a 100% free no-obligation loan inquiry analysis.

Matt Pell,  Loan Officer
Mortgage Warehouse, LLC
(239) 672-8502 – Direct Line
(239) 344-9223 – Fax
Company NMLS ID – 137154
Individual NMLS ID – 1018529
Better Business Bureau Rating = A+

Posted on February 3, 2014, in Finance and tagged , , , , , , , , , , , , , , , . Bookmark the permalink. Leave a comment.

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