Could Tariffs Push Interest Rates Higher? Here's What It Means for Your Wallet
KEY POINTS
- Tariffs don't directly cause interest rates to rise.
- If inflation rises, interest rates tend to follow.
- Historically, tariffs have made goods and services more expensive.
Tariffs and interest rates are more connected than you might think. If tariffs drive up prices, inflation can follow -- and when inflation rises, the Federal Reserve often steps in by raising interest rates.
Rising interest rates mean it gets more expensive to take out a loan or buy a house, but it isn't all bad news. Let's break down how to set yourself up for success if tariffs drive up interest rates.
How tariffs affect prices and inflation
A tariff is essentially a tax on imported goods. When tariffs go up, businesses often pass the cost to consumers, making products like electronics, cars, and even groceries more expensive. This can lead to higher inflation, which is when the general price level of goods and services rises.
For example, if tariffs increase the cost of raw materials like steel or aluminum, companies that use those materials -- like car manufacturers -- have to pay more. To maintain profits, they often raise prices on their products, leading to higher costs for consumers.
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Why inflation could lead to higher interest rates
If tariff-fueled inflation rises too quickly, the Federal Reserve may raise interest rates to slow down borrowing and spending. Higher rates make it more expensive to take out loans, which can cool down inflation by reducing demand for goods and services.
A past example of tariffs and inflation
Historically, tariffs have contributed to inflation in some cases. The trade war between the U.S. and China in 2018-2019 led to price increases on consumer goods, and the Fed raised interest rates multiple times during that period. While tariffs weren't the only reason for rate hikes, they played a role in rising costs that led to inflation concerns.
What this means for you
Tariffs and their effect on interest rates could impact consumers in a few key ways.
1. Saving will become more rewarding
Higher interest rates also mean better returns on savings accounts, CDs, and money market accounts. If rates rise, a high-yield savings account is one of the best places to park your cash. They routinely offer interest rates close to 10 times that of the national average.
Tired of watching your savings languish at a sub-par APY? Check out our list of the best high-yield savings accounts to begin maximizing your savings today.
2. Borrowing will get more expensive
If tariffs push inflation higher and the Fed responds with rate hikes, expect higher interest rates on credit cards, mortgages, auto loans, and personal loans. If you're planning to buy a home or refinance a loan it may be wise to lock in a lower rate sooner rather than later.
3. Stock market volatility
Rising interest rates often make borrowing more expensive for businesses, which can slow down corporate growth and lead to stock market uncertainty. If tariffs contribute to rate hikes, we could see increased market swings as investors are unsure how to react.
Don't panic
If you're worried about potential rate hikes, consider locking in low rates on loans now, keeping an eye on your credit card interest, and taking advantage of higher savings account yields if rates do rise.
Tariffs and interest rates might seem complex, but their impact on your wallet tends to be simple. By staying informed and planning ahead, you can make smarter financial decisions.
Our Research Expert
Jake is a full-time Editorial Strategist for Motley Fool Money. He specializes in product ratings and all things credit cards, and wants to make sure each person has the best card for them.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Motley Fool Money does not cover all offers on the market. Motley Fool Money is 100% owned and operated by The Motley Fool. Our knowledgeable team of personal finance editors and analysts are employed by The Motley Fool and held to the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands. Terms may apply to offers listed on this page. APYs are subject to change at any time without notice.