Because higher interest rates mean higher borrowing costs, people will eventually start spending less.
The demand for goods and services will then drop, which will cause inflation to fall.
Inflation was at 14% a year, and the Fed raised interest rates to 20%.
Is a higher interest rate better?
High interest rates make loans more expensive. When interest rates are high, fewer people and businesses can afford to borrow. That lowers the amount of credit available to fund purchases, slowing consumer demand. At the same time, it encourages more people to save because they receive more on their savings rate.
Are higher interest rates good for banks?
As interest rates rise, profitability on loans also increases, as there is a greater spread between the federal funds rate and the rate the bank charges its customers. This is an optimal confluence of events for banks, as they borrow on a short-term basis and lend on a long-term basis.
What is considered a high interest rate?
A loan that is considered high risk will have a higher interest rate. Consumer loans typically use an APR, which does not use compound interest. The APY is the interest rate that is earned at a bank or credit union from a savings account or certificate of deposit (CD).
What happens when interest rates go up?
As interest rates move up, the cost of borrowing becomes more expensive. This means demand for lower-yield bonds will drop, causing their price to drop. As interest rates fall, it becomes easier to borrow money, causing many companies to issue new bonds to finance new ventures.