No analyst or economist (or journalist) can know the future with certainty. But if the past few months are any indication, it looks like we’ll continue to see a healthy rise in interest rates throughout 2022.
Many macroeconomic mechanisms can affect interest rates. Let’s see how these different factors affect whether interest rates will rise.
Interest rates typically rise when the Federal Reserve says so
Historically — and as shown this year by the very many bank announcements and press releases we received — when the Federal Reserve increases the federal funds rate, interest rates increase on products you get from banks, like loans and deposit accounts.
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While this means it can be more expensive to borrow money for major purchases like a car, house or home renovation, it also means banks are likely to offer lower interest rates. higher interest to customers on checking accounts, savings accounts and certificates of deposit.
This is good news for me, personally, since the interest rate on my savings account has been increased several times this year.
At NerdWallet, we closely monitor interest rate developments on deposit accounts. Throughout the pandemic and into early 2022, interest rates were low; even most “high yield” accounts had an annual percentage yield, or APY, of only around 0.50%. In 2022, the Fed began a series of rate hikes to help slow inflation, which led to industry-wide interest rate hikes. Now we see some banks dramatically increasing their interest rates on checking accounts, savings accounts, and certificates of deposit. Some even exceed 2% APY or more.
What effect will high inflation have on my money?
Inflation can have a dramatic effect on the value of your money, making it less attractive as inflation rises. Essentially, the price of consumer goods is going up all over the place, which means you’re not able to buy as much with the same amount of money as before. For my budget, that has meant adjusting my grocery spending and trying not to drive so much so I don’t have to spend so much on gas.
In times of high inflation, it can seem a little pointless to keep your money in a bank account. After all, even a high-yield interest rate of 2% APY might not seem very high given current inflation of 8.5%.
However, a high interest rate on your savings can reduce inflation and help preserve the value of your money — at least, much more than keeping your savings in a low-interest account.
Shopping around is a good way to take advantage of high interest rates, Francisco Alvarez-Evangelista, an adviser at financial analyst firm Aite-Novarica Group, said in an email.
“If this is something important to consumers, the digitalization of banking has made it easier than ever for consumers to find the best choice and open a bank account online,” Alvarez-said Evangelista.
What happens to interest rates in a recession?
If the economy and the labor market end up slowing too much, the United States could face a recession. During a recession, the demand for credit, like loans, declines because we spend less and save more. As demand declines, the Fed may choose to lower interest rates to stimulate growth.
The word “recession” may trigger some anxiety for those of us who lived through the financial events of 2007-2009, but I have good news from Jerome Powell, the chairman of the Federal Reserve. Powell believes the US economy is neither in recession nor heading into a recession, as the US labor market is currently very strong. He also said a slowing economy – while keeping unemployment low – can be good.
“We actually think we need a period of growth below potential, to create some looseness so that supply can catch up,” Powell said at a July 27 press conference. .
How can I deal with inflation and a possible recession?
The best way to deal with inflation and a possible recession is to increase your savings, if possible. We generally recommend that you keep three to six months of savings on hand for emergencies, which should help you out in the event of job loss. If that seems like too much, start with as much as you can. You’ll probably feel better knowing you have a little cushion in case the economy slows. Beyond that, you might want to take a look at your spending habits and see where you can be more strategic, Alvarez-Evangelista noted.
“Whether it’s saving more on higher interest rate accounts, finding lower cost or generic alternatives, finding deals where possible, or enrolling in rewards to get discounts or free perks, consumers need to take a big picture view of their current financial situation and find ways to maximize their money, anywhere and everywhere.
The economy may seem unpredictable right now. High inflation makes things more expensive, and high interest rates on loans can make it harder to finance major purchases. If higher unemployment rates were to factor in, a recession would be likely. But no matter the scenario, it’s a good idea to shore up your financial security.