The Federal Reserve’s decision to raise interest rates by 50 basis points will affect everyone, be it citizens, companies, investors, or even countries.
This increase, which the Fed Reserve Chairman Jerome Powell expected to be followed by another, bolder one, will affect the interest rate on loans, credit cards, mortgages, car financing, savings accounts, and others.
In other words, if you are thinking of buying a house or a car or any other of your immediate needs, you should think carefully. Borrowing money for these types of needs will become more expensive, causing many of you to refrain from buying.
If you have a housing mortgage and especially if you provide a fixed rate of interest, there should be no changes to your mortgage payments until you reach the end of the fixed rate period. But the borrower on a floating rate mortgage will feel the change once the next monthly payment is due.
For credit card holders, interest rates are already high. This type of debt is particularly susceptible to high interest rates. Now, consumers will have to pay more interests on any new debts through their credit cards.
Monthly payments for personal loans and auto financing will rise. The gradual increases this year will reduce consumers’ desire to borrow at high interest rates.”
The good news is that deposit holders will benefit from a marginal increase in their deposits that will enhance their savings power.
The tightening of US monetary policy will lead to a tightening of the external financing conditions for countries with high foreign borrowing, at a time when many emerging countries are heading to issue foreign currency bonds to meet their deficit financing needs. This means that raising interest rates will increase the cost of borrowing for these countries.
Developing countries and economies with high risks will also be forced to raise interest rates on fixed debt instruments, including treasury bills, at higher rates, to be able to compete with the demand for investment in the US dollar.
In turn, raising interest rates will lead to an influx of capital from emerging markets to the United States, and thus reduce financial flows to developing countries and emerging markets. Here we recall what happened in 2013 when the Federal Reserve decided to tighten its policies, which caused a sudden rise in yields of US Treasury bonds and caused turmoil in financial markets.
Goodbye cheap money
It is true that the Fed’s decision can help curb inflation in the US, but from now on we have to say goodbye to cheap money. Any quantitative easing policy funds that central banks previously adopted for families, companies and governments, allowing them to borrow at favorable rates during the Corona pandemic, the move today to the quantitative tightening policy will lead to raising borrowing costs and drying up cash liquidity.
“For the first time in 22 years, the Fed is preparing to raise interest rates by more than a quarter of a percentage point,” Greg McBride, chief financial analyst at Bankrate, told CBS ahead of the Fed’s announcement. These are hints to families that now need to stabilize their financial resources – Pay off debt, especially expensive credit cards and other debt with variable rates, and boost emergency savings.”
Anticipating this, another experts says, “There is no doubt that a major shift awaits the world away from easy money, with the pandemic-related bond purchase programs by central banks moving in the opposite direction, which threatens to cause another shock to economies and financial markets around the world.”