Historically, there are a few key indicators that can signal a potential rise in interest rates. Perception of a robust economy, increased consumer spending, and high employment levels could all combine to lead to a hike in interest rates. 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. In this fiscal environment, financial institutions should pay particular attention to how rising interest rates could affect their bottom lines.
When interest rates are higher, banks and credit unions attract more deposits, and deposit products enjoy greater popularity among members.
For example, according to The Financial Brand, when the federal funds rate was more than 5% in 2007, nearly 25% of consumers had a CD, but only 15% had one in 2017, when the interest rate was less than 2%. In 2007, 21% of consumers had a money market account, compared with 17% in 2017.
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