As interest rates continue to increase, credit has tightened and loans are more challenging to access. What does that mean for you going forward?
The Federal Reserve started increasing interest rates back in March of 2022 as a way to tamp down the quickly rising inflation rate. Between then and now, interest rates have increased several times, increasing from zero to 5.25%. There is a chance the Fed could hike rates again at its June meeting.
Here’s the good news – the Fed’s intention of slowing the inflation rate is working. Inflation peaked at 9.1 percent in June 2022, and was sitting at 4.9 percent as of April 2023.
But this hasn’t come without consequences. As inflation slowed, so has credit and loan availability.
We can see this in U.S. commercial bank deposits, which fell 4.9 percent – the steepest decrease in history. As deposits decrease, so does lending.
With less borrowing comes less spending, which ultimately leads to a sluggish economy.
Credit and Loans Tightening: What it Means For You
Credit and loans tightening does make it more difficult for the average person to borrow money, but it also makes it more challenging for corporations to grow and profit. And when corporations lose profits, stock prices fall in response. We saw this especially in 2022, when stocks hit record lows. The markets have recovered somewhat this year, but not spectacularly. They are a bit stuck this year, struggling to gain momentum to recover from the past year.
As for lending, some borrowers will still be able to access credit. But it will mostly be the borrowers who are likeliest to pay back their loans. So people with strong credit scores and consistent income will have an easier time securing loans.
Credit and Loans Tightening: How Should You Respond?
It’s not all bad news. For starters, the unemployment rate is still low, meaning Americans have been able to stay afloat and pay their bills, even in the face of high prices. Another piece of good news is that savings rates are high, so if you wanted to capitalize on something right now, saving could be a good option. High-yield savings accounts and CDs are also doing well right now.
The looming question is still whether this upheaval will lead to a recession. The answer is that no one knows for sure, but it is a possibility. So saving might be an even bigger priority, as we face some uncertainty ahead.
There are also opportunities among market and economic challenges. I offer some tips in my post, Investing Your Way Through a Recession.
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