Why Are Interest Rates So High?

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Why Are Interest Rates So High?

If you're trying to borrow money right now, you probably have realized that interest rates are alarmingly high. But why? The short answer would be inflation. To understand the issue in more detail, let's take a deeper look into why inflation is causing swelling interest rates. 

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High Interest Rates Fight High Inflation

It's no surprise that inflation has been the cause of concern for many Americans recently. Between government spending, supply chain issues, stimulus money, and more, the rate of inflation has skyrocketed. As of this month the annual inflation rate for the United States is 7.7%. For context, this has more than tripled in size compared to 2019’s rate of 2.3%. With the highest inflation rates in U.S. history, the Federal Reserve is desperately looking for a solution to combat these bloating numbers. So how do they tackle this? By raising interest rates.  

When the Federal Reserve chooses to increase interest rates, it sets off a calculated chain of events. Because it is so expensive, the public is deterred from borrowing money. This in turn means that the average person has less money on hand to put into purchasing products and services. With less purchasing power, the demand for supply decreases, thus slowing down business growth and share prices. As a result, the economy cools down as a whole. During this time, the interest rates for savings products such as certificates of deposit (CODs) and savings accounts also increase. Once again, individuals are encouraged not to spend money but instead save it, which leads back into slowing down the economy through controlling supply and demand.

Solutions for High Interest Rates

While we cannot control the decisions of the Federal Reserve, there are some solutions that can be taken to ensure your interest rate is as low as possible. A big step in the right direction is raising and maintaining your credit score as much as possible. Another answer is by choosing loan programs that can mitigate issues of inflation and interest such as Federal Housing Administration (FHA) loans for first time home buyers and reverse mortgages for those wanting to fight inflation. Whatever decision you make, PCL wants to help. Contact us today and let our expert team help you achieve your goals.  

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