Higher interest rates have considerable impact on consumers. The benchmark federal interest rate is linked to over night loans between banks which influences other borrowing costs as banks invariably raise their interest rates in line with that of the Federal Reserve. Thus with Federal Reserve having a 5. 25 percent interest rate, banks increased their lending rates from 8 to 8. 25 percent. (Henderson, 2006). This has an impact on the consumer as the interest rates on credit cards, mortgages and home loans also increases and hence the consumer tends to spend less.
To encourage the buyer to spend, costs of goods are generally brought down and the inflation rate thus simultaneously comes down benefiting the consumer. Individuals who want to save also gain from higher interest rates as it increases the interest on saving instruments. With inflation in check the cost of basic goods including energy also remain in control and the overall circle of low inflation is established, immensely benefiting the consumers.
However this may not always happen and at times business passes on the higher costs of basic goods such as energy and other raw materials to the consumer, on the plea of having to bear the burden of higher interest rates. (Henderson, 2006). In such cases the prices of primary commodities go up which in turn influence the prices of other goods as well and the customer has to bear the overall burden.
In such cases the aim of the Federal Reserve to bring down inflation does not fructify as the consumer is not benefited. The result may be another interest rate cut as an attempt to bring down inflation. The US economy has seen this happening over the past many quarters with limited benefits of interest rate hikes being passed on to the consumer in terms of lowering of inflation rates.
1. Henderson, Nell. 2006. Key Fed Rate Raised to 5. 25%, A 5-Year High. The Washington Post 30 June 2006.