Think about the idea of rate hikes or rate cuts as slowing down the expansion of the economy (hike rates to pump the brakes) and to encourage growth in the economy (cut rates to apply gas to the engine). The real world effects on consumers and businesses are such that hiking rates makes funds more expensive while cutting rates makes funds cheap and more accessible. Think about the current cycle when the Fed, seeing that 1. the economy was seeing sustained growth and job creating and 2. the growing concerns of having cheap money for too long. Keeping interest rates too low for too long can result in a housing bubble for example – too many people with too much access to funds buying or building too many homes. This is exactly why the Fed will “pump the brakes” to slow the economy and allow for a soft landing as slower growth is expected and fewer jobs are created. Currently, with a series of rate hikes since December 2015, the Fed is now pumping the brakes.
Smoothing out cycles with limited success. Bubbles do form but the Fed does try to smooth out cycles – the only problem is that sometimes, they do get it wrong and the consequences to the economy are scary, remember the Great Recession of 2008? An overheated economy could eventually lead to a collapse with serious negative impact to the housing market, the number of people unemployed etc. Historically the Fed has made poor decisions, triggering shocking recessions and even a Great Depression that saw unemployment jump to 35% in the 1930s. And it is important to note that when the stock market and economy collapsed in the late 1920s and early 1930s, the Fed actually had solutions that worked but very confused and foolish leaders broke down under pressure. In hindsight, the cures were easy, the decision makers made too many mistakes.
These rate hikes impact Credit Card Rates, Savings, US National Debt, as well as Auto Loan Rates and Mortgage Rates. Higher rates are usually positive for Banks and their profits but for other businesses, the rise in interest rates will likely have negative impact. Home Sales will likely slow as well when rates are being elevated. This means the rise in borrowing costs, which t0uches every part of the economy will, in the end impact Consumer Spending – and when consumer spending fades, the economy, which is driven by the consumer who is responsible for 70 percent of economy activity, well just about everything starts to see a fall in activity.