In recent months, there has been a lot of speculation around the Federal Reserve increasing interest rates. According to a forecast from Goldman Sachs, the combination of rising inflation and a labor market near full employment is likely to impact this decision.

What Happens When Interest Rates Rise?

Short-term borrowing costs for financial institutions are immediately impacted when the Federal Reserve acts to increase the discount rate. This creates a ripple effect for most other borrowers in an economy, including both businesses and consumers.

When financial institutions’ costs rise, they often increase the rates they charge their borrowers. This impacts consumers through credit card rates, mortgage interest rates, and more.  

So, although it may seem like Federal Reserve interest rates only impact financial institutions, they also impact consumers who borrow.

What is Fueling the Decision?

One of the Federal Reserve’s functions is to promote stable prices in the U.S. economy. Raising interest rates is one of the tools it uses to perform that function. Some people try to predict Federal Reserve interest rate increases. Current inflation readings are expected to show prices rising at their fastest pace in nearly 40 years, according to Goldman Sachs. If the Dow Jones estimate of 7.1% year-over-year consumer price index growth in December is correct, that would be the sharpest increase in inflation since June 1982.

In addition, the Fed has significantly decreased their purchasing of Treasurys and mortgage-backed securities in order to reduce the amount of liquidity in the economy, and thereby slow inflation. The Fed had been buying $120 billion a month, but as of January, cut that number in half, and may stop altogether soon. This can have the effect of slowing economic growth.

Consider Medallion Bank

Working with an experienced financial lender, one that specializes in recreation and home improvement lending, can help you continue to sell even in times of rising interest rates.

If you are interested in working with Medallion Bank, please contact our team today to learn more about our credit evaluation process.