Interest Rates Rise
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An interest rates rise in the US is done by the US Federal Reserve or the Fed to accommodate overall changes in the economy. For instance, if the inflation is increasing rapidly or is too high, the Fed will increase interest rates or prime rates to slow down the economy and to reduce inflation. On the other hand, if the overall health of the economy is not healthy, the Fed will slash interest rates to promote growth.[br]
Effects of Interest Rates Rise
Interest rates rise can create serious problems for the personal finances of people. For example, people with home equity line of credit or huge credit card payments feel the worst impact. Business confidence also decreases, since rise in interest rates discourages investment. Here are some major effects of interest rates rise on individuals and businesses:
Increase in Government Debt: The US has one of the highest public debts in the world. When the interest rates rise, the government need to pay more leading to further increase in debts. The government may raise taxes to offset the increase in debt obligations.
Cost of Borrowing: Interest rates rise leads to increase in the cost of borrowing. Interest payments on loans and credit cards become more expensive, leading to decrease in borrowing. People who have taken loans pay more interest money, leading to a decrease in disposal income, ultimately leading to decline in consumption.[br]
Incentive to Save: Because of the higher interest rates, people save more in deposits rather than spend. This ultimately leads to economic slowdown.
Value of the US Dollar: Interest rates rise will lead to a stronger US dollar. The strength in dollar will result in exports from US becoming less competitive. This means the exports from the US will decrease and imports will increase. This situation will lead to a decline in aggregate demand of the entire US economy.
If the interest rates rise continuously for a longer period of time, it affects both individuals and businesses. The number of business start ups decrease. Existent companies cut down their expansion plans and activities, thus leading to a slowdown in the overall economy.
