What does raising interest rates accomplish? It makes us consume less of anything we pay interest on
Mere weeks after the Fed’s decision to raise interest rates for the first time in years, by 0.25%, several big banks anticipate the trend will gain traction, precipitating a series of aggressive interest rate hikes throughout the year.
The central bank’s logic is that to deal with rampant inflation, there’s nothing for it but to slam on the brakes and reduce demand by raising interest rates.
What does raising interest rates accomplish? It makes us consume less of anything we pay interest on.
First and foremost, it’s expected to cool the red-hot real estate market, where prices have surged in the two years of the coronavirus crisis, largely as a result of many Americans’ desire to move out of crowded city apartments into larger houses with backyards. High demand combined with negligible interest rates led to a meteoric rise in housing prices, while at the same time many investors entered the market due to the low-risk characteristic of a zero-interest-rate environment. The expectation is that now, with interests rates a little higher, some investors will leave the market, bringing down prices somewhat.
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