TEMPLE, Texas — One thing is for sure, money has gotten much more expensive.
Interest rates have risen, and we all now pay more to borrow. It's all happened due to inflation. In this edition of Money Talks, 6 News takes a deeper look at the cause and effect.
One of the tools the Federal Reserve has to fight inflation is to raise what's known as the Fed Funds Rate. This is the interest rate that banks charge each other for short-term loans. That then gets passed on to the consumer.
"An interest rate is basically the cost of money," said Certified Financial Planner Neil Vannoy. "Lower rates make borrowing money cheaper, and higher rates make borrowing more expensive."
Borrowing to get a home loan or a car has gotten much more expensive, but it wasn't this way throughout the teen years when we saw historically lower and lower rates.
"Lowering interest rates can help stimulate the economy since individuals are more likely to borrow when rates are low," explained Vannoy. "This leads to people buying new cars, new houses and businesses borrowing to hire or expand operations."
After a period of great growth, we now have the Federal Reserve Bank trying to slow our economy to bring inflation down. This has been going on for over a year.
"It might sound counterintuitive, but sometimes the economy can grow too quickly and "overheat" which can cause inflation," said Vannoy. "Increasing interest rates will often lead to less economic activity and help slow down an overheating economy."
That is where we are now, the fine razor's edge where The Fed has to be careful not to slow the economy so much that job layoffs grow, putting us into a recession or worse.
Vannoy went on to mention that The Fed increasing the Fed Funds Rate doesn't directly increase the interest charged on other types of loans, but generally, it will lead to increases throughout the banking system. Which is where we are!
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