economy

What Happens When the Fed Raises Interest Rates

A financial analyst warns that if the Federal Reserve raises interest rates, it could create turmoil in the broader financial system.

By Piggy PressSep 16, 20262 min read 2 new words

In simple terms

If the Fed raises rates, it will cost you more to borrow money for a house, car, or anything else on credit, and it could also affect your savings account interest, your stock portfolio, and your job security if it causes economic disruption.

Steven Major, a financial advisor in Dubai, is raising an alarm about what could happen if the Federal Reserve decides to raise interest rates. The Federal Reserve is the central bank that controls how much it costs to borrow money in the United States. When the Fed raises its rates, banks pass those costs on to everyday borrowers—making mortgages, car loans, and credit cards more expensive.

Major warns that a rate hike could trigger what's called a "financial conditions event," which is a fancy way of saying something bad could happen across the financial system. This might include stock market volatility, credit crunches, or other disruptions. The concern centers on the yield curve, which is simply the difference between how much money you earn if you lend money to the government for a short time versus a long time. When these rates change suddenly, it can shake up how banks and investors make their decisions.

Fun fact

The yield curve is one of the most closely watched signals on Wall Street because historically, when it inverts (short-term rates exceed long-term rates), it has often predicted recessions.

Economy

Source: Bloomberg Markets