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 * Life & Money
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 * Growing Your Investments

 * Evan Cooper
 * May 02, 2022


INTEREST RATES ARE GOING UP: HERE’S WHAT TO KNOW

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There’s been much talk in the media lately about rising interest rates. In
addition to rattling the stock market, the focus on higher rates has also
worried many potential homebuyers who face higher mortgage payments, as well as
those in the market for a vehicle, who could be saddled with higher monthly
payments.

Given those and other troublesome effects, it would seem that higher rates are
bad and lower rates are good. In reality, the truth lies somewhere in between.
And understanding interest rates more fully can help you put current headlines
into perspective. Here’s what to know.


WHAT DRIVES INTEREST RATES, AND WHY ARE THEY IN THE NEWS?

While there are a number of factors that drive interest rates, in the U.S., they
tend to follow a rate that the Federal Reserve charges to banks that borrow
money. When the Fed lowers interest rates, it encourages borrowing and tends to
spark more economic activity (think more people building new homes or companies
investing in new equipment). If economic activity becomes too robust, it can
lead to inflation. That’s often when the Fed raises rates (which is sometimes
referred to as tightening policy). This makes borrowing more expensive and tends
to lower economic activity.

Currently, the Fed’s economic policymakers are raising interest rate levels in
an attempt to cool the economy enough to slow inflation, yet not so much as to
cause a recession. While interest rates remain low by historical measures, the
Fed has signaled that rates will continue to increase throughout the year.


HOW INTEREST RATES GOING UP CAN IMPACT YOU

There are a number of different ways interest rates can impact your money. Here
are some of the most common:

 * Credit cards or other adjustable-rate loans. If you have credit card or other
   adjustable-rate debt, the interest you’ll be charged will increase as rates
   rise. This would be a good time to review debt and consider your plan to pay
   it down.
 * Homebuying. The housing market has been strong lately, fueled in part by low
   interest rates. The good news is that if you have locked in a fixed mortgage
   rate, your rate won’t increase as interest rates rise elsewhere. But for new
   homebuyers, increased rates will increase the monthly payment.
 * Savings or bond investments. If you’re earning interest on money you have in
   savings or invested in bonds, you’ll likely see that interest increase.


WHAT’S THE POINT OF INTEREST ANYWAY?

The rate of interest is a way of expressing the cost of borrowing money as a
percentage of the total amount borrowed for a year. For example, borrowing
$1,000 at a 5 percent interest rate means paying $50 a year in interest. That
cost incorporates a few key elements. One is the time value of money, which is
another way of saying that having a dollar in hand today is worth more than
having a dollar a year from now. After all, having money today means you can put
it to work by spending or investing it now rather than waiting. Borrowers are
willing to pay an amount for the privilege of being able to use the money
immediately.


RISK AND INFLATION

Another component of interest rates is risk. For lenders, there is always the
chance that the borrower won’t pay back what’s owed. That’s called credit risk,
and lenders demand compensation for that risk, which figures into the interest
rate that is charged.

Another key element is inflation. Lenders expect that the dollars they receive
when they are repaid will have the same purchasing power as the dollars they
loaned. If lenders expect that inflation will erode the value of those dollars
by decreasing their purchasing power — meaning it will take more dollars to buy
the same amount of goods or services — lenders will demand a higher rate of
interest to compensate for the loss of value due to inflation.


WHO BENEFITS FROM HIGHER OR LOWER INTEREST RATES?

Generally speaking, lower interest rates favor borrowers and higher rates favor
lenders. The past several years have been advantageous for borrowers, as
interest rates have been extremely low by historical standards. That means if
you have money, it will be easier to put it to work and make more money. But if
you’re planning to borrow money, you will pay more.

While headlines about the impact of rising rates can be unnerving, history has
shown that the economy has grown during periods of low and high inflation, as
well as during times without inflation. It has also grown when interest rates
were low as well as when they were high. Working with a financial advisor can
help you to feel more confident at times like this. Your advisor can help you
build a plan to grow your wealth over time and through different economic
conditions.

HAVE A QUESTION OR A TOPIC TO DISCUSS WITH YOUR ADVISOR?

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RETIREMENT PLANNING: HOW MUCH DO YOU NEED IN SAVINGS?

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HOW MUCH DO YOU KNOW ABOUT FINANCIAL PLANNING?

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HOW MUCH DO YOU KNOW ABOUT WORKING WITH A FINANCIAL ADVISOR?

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article


SMART MONEY MOVES FOR RISING INTEREST RATES

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article


WHAT’S THE REAL INTEREST RATE AND WHY DOES IT MATTER?

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article


WHY INTEREST RATES ARE RISING IN 2022

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insurance is issued by Northwestern Long Term Care Insurance Company, Milwaukee,
WI, (NLTC) a subsidiary of NM. Investment brokerage services are offered through
Northwestern Mutual Investment Services, LLC (NMIS) a subsidiary of NM,
brokerdealer, registered investment adviser, and member FINRA and SIPC.
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Wealth Management Company (NMWMC), Milwaukee, WI, a subsidiary of NM and a
federal savings bank. Products and services referenced are offered and sold only
by appropriately appointed and licensed entities and financial advisors and
professionals. Not all products and services are available in all states. Not
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of NMWMC are credentialed as NMWMC representatives to provide investment
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