After a seven-year lull, the Federal Reserve is starting to raise interest rates in an effort to curb inflation that has reached 40-year highs. The hikes will have many different impacts, from raising the cost of mortgages and credit cards to crimping the profits of businesses that need to borrow to expand. Historically, Fed rate hikes have also triggered problems in foreign markets. But this time, a new study co-authored by Brookings experts Sebnem Kalemli-Ozcan and Filiz Unsal suggests that better monetary policy credibility in emerging economies and developing countries could help them withstand the impact of higher U.S. interest rates.
The Fed’s goal is to fend off soaring prices and slow growth without triggering recession and the job losses that come with it. Raising rates is a delicate balancing act that can be hard to pull off.
For most people, the impact of a rate hike will vary depending on their financial situation and priorities. For example, people with a fixed-rate mortgage will face more expensive payments when rates rise, while those with credit card debt will be hit with higher annual percentage rates (APYs). People saving for retirement or college may see their savings vehicles offer higher returns, but they also may lose some of the purchasing power that comes from a lower interest rate environment.
In addition, the tighter financial conditions that are a byproduct of the rate hikes can also have effects abroad. They can affect credit spreads, stock prices and the dollar. And they can create ripples in global business and trade that might hamper foreign efforts to fight inflation.