The Fed uses interest rates to nudge the economy – low rates to stimulate, preventing the economy from stalling out – high rates to put the brakes on inflation. Economic conditions also affect them. So interest rates fluctuate a lot.
In the 1980s mortgage rates went as high as 18%. I remember shopping for a bigger house when I lived in D.C., only to abandon the plan because interest rates were more than double the mortgage I already had. It was 8%, then considered a steal.
But in recent years interest rates have been closer to 4%, sometimes less. That's so low, community banks reported their profits were squeezed by the low rates. But now that the Fed has begun nudging rates higher, what will happen to lending? The reason TO nudge is to slightly apply the brakes.
But some economists think higher rates could actually stimulate borrowing for awhile. Their thinking is, companies and people might rush to borrow at 4-and-a-half percent, rather than take their time and find themselves two years from now borrowing at 5-and-a-half percent.
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