Is your institution prepared for rising interest rates?

In order to tamp down stubbornly high inflation, the Federal Reserve recently announced a third consecutive 0.75 percentage point rate hike in late September, further increasing the cost of debt for credit cards, auto financing, and other loans.

According to CNBC, “The fifth-straight increase to the federal funds rate brings it to a range of 3% to 3.25%, the highest it’s been since 2008. Typically, rate increases come in 25 basis point increments, but the Fed has been using supersized hikes to curb the rate of inflation, which is currently up 8.3% year over year — well above its benchmark target of 2%.”

Higher interest rates reduce disposable income (and therefore consumer spending), increase the cost of borrowing, hamper the speed of economic growth, and limit the rate of inflation.

Increased interest rates also increase the yield on financial institutions’ cash holdings. This creates a favorable environment for institutions to increase their profitability. Financial institutions should pay particular attention to how rising interest rates could affect their bottom lines in this fiscal environment.


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