The Federal Reserve raised interest rates four times in 2022, with experts anticipating more on the way. The benchmark lending rate is now 2.25-2.5% after starting the year near zero. Following years of easy money, Americans will have a tough road ahead as the nation teeters on the edge of a recession. There is a lot of doom and gloom in economic circles, but we want to highlight some ways you can benefit from higher interest rates in this week’s Five for Friday.
#5: Lower prices
We start with lowering prices because raising interest rates is the number one tool the Fed has to tame rampant inflation. Higher interest rates mean fewer loans, which results in less capital floating around the economy, in turn slowing demand. This, in theory, will push down prices. Not everyone has faith in the Fed’s mechanism for getting a hold of inflation, but July did see stability in month to month inflation. Overall, it’s a long game and too early to tell.
#4: Better home prices
Rising interest rates are already cooling the red hot housing market. Interest rates near zero gave fantastic mortgage rates, and over the last two years, homes were selling at breakneck speeds and with dozens of people competing for the same property. In turn, values skyrocketed. As you can imagine, higher interest rates do the exact opposite. While home values are still trending up slightly, it’s nowhere near the 25% year-to-year surge of mid-2021. So if you are still on the fence about whether you should take the plunge into homeownership, this should be a less competitive time to buy.
#3: Savings yields
Higher rates aren’t always bad. In fact, it means you can earn more interest on savings accounts. At the start of the year, a decent online savings account would yield roughly 0.5 percent. Today, that same account is pushing around 2%. This is especially beneficial for retirees living on fixed income, who can see their accounts make some money with little effort and no risk. The savings rate in the U.S. hit a record early during the pandemic and if there’s a downturn coming, you’re going to need a nest egg.
#2: Series I bonds
Series I bonds are literally inflation bonds meant as a hedge against rising prices. The yield is set twice a year based on factors related to the Consumer Price Index. And with year over year inflation running near 4 decade highs, I bonds are returning close to 10%. There are a few caveats: You can only invest $10,000 per year and you have to keep them locked away for at least a year. Look, it’s not the most exciting investment strategy on Wall Street, but it is a guaranteed return.
#1: Stronger dollar
Higher interest rates strengthen the U.S. dollar, which gives Americans more buying power when traveling abroad. In fact, the greenback reached parity with the euro in July for the first time since 2002. Last summer, consumers would get around 0.81 Euro for every dollar. So take the opportunity to book that trip to Italy and enjoy the finer things in life. Hopefully your flight won’t get canceled.