Making The Most Of Record-High Interest Rates

There has been an increase in interest rates over the last 12 months at a pace that we have not seen since the late 1970s. This fact should cut through all the noise and signal that we are entering a historic new era when interest rates are rising at a historically high level.

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We need to understand how we got here, not only because it is interesting - but because it is crucial to helping you plan how (and where) to move your money in order to make sure that it can withstand the challenges of a high-rate environment while taking advantage of higher annual percentage yields. Listed below are two actions that you can take now to make the most of this moment, as well as a description of how we got here and where we may be headed in the near future.

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Invest your savings in a high-yield account

Currently, the best high-yield savings accounts have an interest rate above 4%, which is one of the best rates around. Elliot Eisenberg, a chief economist of GraphsandLaughs, a consulting firm that specializes in economics, believes that saving has become increasingly valuable in recent years. “You should not leave your savings where they used to be, inside a checking account that does not pay you anything ... make sure to get good returns on your savings.”

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Repay high-interest debts

Debt is also more expensive when savings account rates are higher.

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Paying down high-interest debt may help you save more as credit card APRs rise toward 20%. It might also make sense to borrow money in order to pay off the more expensive debt in the long run, Eisenberg adds. There is, however, a cost associated with borrowing money which is only going to increase as the interest rates on loans continue to rise.

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Having a debt consolidation loan can be a great way for you to consolidate the debts you have into a single, simplified obligation that should (hopefully) charge you less interest than what you were paying on the multiple debts you previously had. It is important to make sure that the upfront fees for your consolidation loan do not offset any savings that you might be able to realize.

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Credit cards with a balance transfer offer allow you to transfer debt from multiple cards to a single card with a 0% APR period, which can be useful for managing expensive debt. Ensure you can pay off the debt before and after the 0% APR period expires since you will be responsible for interest payments afterward.

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Considering today's high-interest rates

Inflation is the main reason rates are so high right now. For the first time in 40 years, the Consumer Price Index crossed 9% in 2022.

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As a result, the Federal Reserve started to increase interest rates with a vengeance since they were somewhat behind the times, according to Eisenberg. “Inflation got out of control because they fell behind the curve."

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There is a reason why rising rates can contain inflation, which is due to the fact that they make borrowing money more expensive, and this should limit consumer spending. There are many economists who predict that there will be a recession in 2023 as a result of this, but that outcome is still far from certain.

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Eisenberg still predicts a slower economy in the future, even if the economy avoids a recession. “There won't be a lot of growth in '23. It's impossible. It's not possible, the high rates will bite," Eisenberg says.

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Eisenberg does not recommend drastically altering your life plans, though. The economic downturn following the financial crisis of late 2007-08 isn't expected to be as severe as that following the financial crisis of late 2008. He advises against thinking back to the last recession. "This isn't that, it's just a regular recession."

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What is the historical trend of today's rates?

As an adult in the 21st century, there is no doubt that today's interest rates are the highest you have ever experienced as an adult. It was the first time in over 20 years that mortgage rates reached a level of 7%, for instance, last fall, which is a record high for mortgage rates.

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Federal Reserve's benchmark Federal Funds Rate has a large influence on rates in general, but there is no single entity that sets interest rates. In the last 15 years, the Federal Funds Rate has been fluctuating between 4.5% and 4.7%, and the Fed has indicated that it will continue to raise rates, although at a slower pace.

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Even though today's interest rates are significantly higher than what they were just a year ago, they do not fall outside of historical norms. During the '70s and '80s, the Federal Reserve's benchmark rate topped double digits many times, and mortgage interest rates climbed into the teens.

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Bottom line

Today's rates are at levels we haven't seen in more than two decades. The result is both an opportunity and a challenge.

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Savers, or anyone looking to increase their savings, can now earn over 4% from a high-yield savings account, money market account, or CD. It has become significantly more expensive in the last year to buy a house or car if you have high-interest debt.