Why Are Interest Rates Rising?

Carole: I think it's time to throw my credit card away. Why am I paying so much more interest?

Katherine: You may be starting to feel the effects of what happens when the Federal Reserve raises interest rates.

Carole: What does that mean?

Katherine: The Federal Reserve raised interest rates for the first time in three years in March and again in May. This means that across the board it's become more expensive to borrow money. So, if you have a personal loan or a mortgage with a variable rate, that interest rate will go up. And any new loans you take out will come with a higher interest rate.

Carole: So, it's not just my spending habits. Why is this happening?

Katherine: You've probably noticed prices have risen for a lot of things. This is due to both supply chain shortages and higher demand for a lot of items. Now, the Federal Reserve is hoping to cool demand to bring down inflation. And to cool demand, they make it more expensive to borrow money.

Carole: When do we get to the good part of all this?

Katherine: Yes, it's not all bad. Hopefully, by cooling demand, prices will fall so you spend less of your paycheck on goods and services. Your bank also may raise the interest rate you receive on your savings account, but that may take some more time.

Carole: Can I do anything about this?

Katherine: If you're able to, it would be a good time to pay off any long-standing credit card debt, but at a minimum, you should anticipate higher borrowing costs in your budget.

Carole: At least this is a one-time thing, right?

Katherine: No, the Federal Reserve has plans to raise interest rates multiple times this year.

Carole: While I still have you. Wait. Where did she go? And where is my coffee?