Economic Perspective: Impacts of Rising Interest Rates

Mike Walden, CALS ARE Extension

MARY WALDEN:

“Today’s program looks at impacts of rising interest rates. Mike, interest rates are on the rise, and there’s a double-edged sword for consumers. Earnings on safe investments like CDs will go up. However, for borrowers, interest cost for loans for homes, vehicles and other items will also increase. What’s the net impact of these effects?”

MIKE WALDEN:

“Generally the net result has been negative because we live in an economy where borrowing is very important. It fuels spending, and so if higher interest rates cause consumers to borrow less and spend less, many worry that could have an adverse effect on the economy. And we have seen that in the past.”

“But I think there are two factors today that will cushion this negative impact. First, consumer confidence is very, very high, and it’s much higher, for example, than it was during the last expansion prior to the last recession. So if consumer confidence is high, people are still more likely to borrow because they have confidence in the future.”

“Secondly, the interest rate increases that we’ve already seen, and that we expect to see, have been very, very moderate. Each time the Federal Reserve, and they’re really the people behind this, each time they’ve increased the interest rate it’s by about a quarter percent.”

“Most economists think that probably the Federal Reserve is on track to raise interest rates this year, maybe another time, as well as next year, and maybe that’ll be it. So maybe another percentage point increase in total in interest rates.”

“And really what the Federal Reserve is trying to do here is achieve something economists call a ‘soft landing’. That is restrain inflation, and inflation is perking up because the economy is growing so fast, restrain inflation, but at the same time avoid a recession. If they can pull that off they will deserve a lot of applause.”

Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.

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