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The 4 Most Important Effects of Rising Interest Rates

Thursday, December 20, 2018   /   by Juli Jenkins

The 4 Most Important Effects of Rising Interest Rates

1. Borrowing Becomes More Expensive

The Fed's key policy rate only applies to overnight lending between banks out of their reserves held at the Fed. In other words, it doesn't affect consumer or (non-bank) business borrowing directly, but the distinction is academic, because it is so closely linked to rates that do affect these borrowers directly.
Home loans are tied directly to Treasury Yields. If the Treasury shoots up then expect higher interest rates on Mortgages. 

2. Deposits Yield More … Eventually

Higher borrowing costs also apply to banks, which take loans from savers in the forms of deposits. In other words, the savings account that currently pays out a few bucks a year – if that – will become more generous.

3. Trouble for Stocks and Bonds

Fed tightening to rising 10-year Treasury yields, which he said could reach the psychologically important level of 3% in the next year. A sell-off in government debt could accelerate the bear market in bonds, which began to take hold almost immediately after Donald Trump's election victory.

4. A Stronger Dollar Strengthens

As higher rates make investing in Treasuries and other safe, dollar-denominated assets more attractive, capital floods out of other countries, particularly risky emerging markets. The result is that the dollar gains against other currencies, which can have profound implications for trade and, in a thoroughly trade-skeptical environment, politics. 

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