Raise the Roof for Higher Rates

Questrom Professor says certain players should actually be pleased with recent interest rate hike.

Jay-Zarg-StoryYou may have heard that The Federal Reserve raised short-term interest rates a quarter point and shared that more hikes are in store this year. But, pump the breaks on your panic. Because, “Not everyone, however, is negatively affected by rising rates, says Jay Zagorsky, adjunct associate professor of markets, public policy & law. He says, in fact, that some may actually have reason to celebrate the recent hike.

In his Boston Business Journal article, “Viewpoint: Why higher interest rates should make you happy,” Zagorsky admits that some will feel the burn of the rising rates, but that is only the case for, “those with lots of floating rate debt, such as credit card balance, or anyone in need of a loan.”

On the flipside, savers, travelers, importers, and companies with lots of cash should be pretty happy about the change. Here’s why:

  • Savers should rejoice because, “Rising rates means people who save money in certificates of deposits, money market funds, and bank accounts will see higher returns,” says Zagorsky.
  • Travelers and importers should cheer about the immediate benefits they’ll see says Zagorsky, “When rates rise in the U.S., the dollar tends to go up in value, which means it can buy more foreign currency. This makes traveling to other parts of the world cheaper.” It also means that imported goods from other countries may wind up being cheaper for people in the U.S., too.
  • For companies with large cash reserves, “When interest rates go up, they make extra earnings on their cash balances,” explains Zagorsky.

The result of the hike, Zagorsky says, “…is less cash sloshing around in the system, which makes mortgages, car loans and credit lines all more expensive. In other words, borrowers take it in the teeth.” (Sorry, borrowers.) However, the recent rise, as Zagorsky says, “signals the economy is on a surer footing.” And for that, we’re all happy.

Read the full article for Zagorsky’s full perspective.



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