Here's what higher interest rates mean for you and the economy

The Federal Reserve has indicated it is going to maintain rates of interest greater for longer. So what does that imply for the financial system, and what does it imply for you?

Related: JPMorgan’s Jamie Dimon says U.S. not ready for worst-case state of affairs for rates of interest

The Fed has pushed up the federal funds charge 5.25 proportion factors since March 2022 to the present goal vary of 5.25%-5.5%. And some economists and traders say the central financial institution will increase charges as soon as extra this 12 months earlier than reversing to charge cuts subsequent 12 months.

Here’s what Goldman Sachs economists take into consideration the financial results of Fed coverage.

“The main implication of the tightening in financial conditions led by rising rates is that the drag on GDP growth will last longer,” Goldman economists wrote in a commentary.

“We now estimate a roughly [0.5] percentage point hit to growth over the next year, meaningful but too small to threaten recession.” GDP grew an annualized 2.1% within the second quarter.

‘Other Risks’ of upper charges

“The move to a higher rate regime poses other risks too,” Goldman stated. “Last cycle [2001-2007], the belief that real rates would remain close to zero helped rationalize a few major economic trends,” Goldman stated.

Those embody: “elevated valuations of risky assets in financial markets, the surprising survival of unprofitable firms in the corporate sector, and wide federal deficits.”

The economists seemed on the penalties if these traits start to unwind.

“In financial markets, the key risk is that valuation measures that are benchmarked to interest rates are now higher for some assets, most importantly stocks,” they stated.

“In the corporate sector, investors might hesitate to continue financing unprofitable companies that they hope will pay off well down the road.”

Workers on the Chopping Block

That may imply “these companies close or cut labor costs more aggressively, as they have tended to do when hit with interest-rate shocks in the past,” the economists stated.

As for the federal government, “projections of … the federal debt-to-GDP ratio look a lot worse than simply a few years in the past,” the economists stated.

They don’t suppose Congress will agree to chop the deficit anytime quickly. But if it does, GDP development may slip 0.5 proportion level yearly for a “number of years.”

To make certain, “while these risks are significant, they are probably not large enough individually to trigger a recession,” the economists stated. And if they’re, “the Fed would likely deliver rate cuts that would offset much of the impact.”

Turning to your personal scenario, greater rates of interest for longer means greater charges in your mortgage, auto, credit-card and financial institution loans. 

But it additionally means greater charges in your financial savings accounts, money-market funds, certificates of deposit and bonds.

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