The benefits and challenges of higher interest rates

Sid Queler

January 12, 2023

Learn how rising rates may affect you.

Freddie Mac, 30-year fixed rate mortgage average in the United States (MORTGAGE30US), bank prime loan rate (DPRIME), federal funds effective rate
(FEDFUNDS), retrieved from FRED, Federal Reserve Bank of St. Louis;, November 18, 2022. Shaded areas indicate U.S. recessions.

The 1980s are memorable for many reasons: The first woman (Sandra Day O’Connor) was appointed to the Supreme Court, NASA launched the first space shuttle mission, IBM presented its first personal computer loaded with Microsoft software, and frequent flyer miles were introduced. Additionally, the interest rate on the 10-year US Treasury note rose to 15.8%, its highest level ever.1

By comparison, the rate on a 10-year Treasury was 3.88% at the end of 2022, after the Federal Reserve (Fed) raised the federal funds rate seven times in its battle against inflation. While the rate remains significantly below its historic high, and quite a bit lower than its historic average (4.27% over the last three decades), rising rates are meaningfully affecting personal finances.1

The pros and cons of higher rates

When the Fed increases the fed funds rate, rates on everything—bonds, mortgages, credit cards—rise too. Changing rates bring opportunities and challenges.

On a positive note, they can:

Push prices down, lowering inflation. Higher rates make borrowing more expensive, which can reduce demand for goods and lead to lower prices. For example, as mortgage rates rose in 2022, the number of people applying for new home loans fell, and home prices retreated.

Give savers a chance to earn more. When interest rates rise, financial institutions typically increase the amount of interest paid on checking and savings accounts, money market funds, and other types of saving vehicles.

Help investors earn returns with less risk. Investors who want to generate attractive returns with less risk may benefit from higher rates. In late December, US Treasuries with short maturities, which are considered to have less risk than many types of investments, were yielding 3.94% to 4.61%.2 While bonds with shorter maturities may be attractive, remain wary of longer maturities until the rising rate cycle ends.

Lift certain sectors of the stock market. Investors may want to consider investing in market sectors that tend to do well as rates rise. These include communication services, healthcare and utilities, which tend to outperform when volatility is high. The financial sector, which includes banks, brokerages and other financial companies, also tends to benefit because lenders raise rates alongside the Fed. In contrast, real estate, consumer discretionary, industrials and materials sectors tend to underperform when rates rise.

However, rising rates also come with some challenges:

Increase borrowing costs. In a rising rate environment, the cost of big purchases increases significantly. New borrowers pay higher rates on auto and mortgage loans, and anyone with a variable rate mortgage or home equity loan is likely to see rates rise. As a result, it could make sense to refinance variable rate loans to lock in relatively low rates. The rate of interest paid on credit card balances also will increase.

Tighten budgets and spending. As borrowing costs move higher, consumers and businesses are likely to borrow and spend less, reducing the amount they owe. In some cases, this may prove to be a hidden benefit as reducing liabilities can strengthen a business or personal balance sheet.

Push stock markets lower for a time. Higher borrowing costs may affect companies’ profits and reduce earnings. When earnings fall, share prices often move lower too. Slower consumer spending may have a similar effect.

Result in poor decision-making. Research into behavioral finance has found that investors have biases that sometimes lead them to make decisions for the wrong reasons.3 In 2008, for example, a friend’s retired parents sold all of their investments near the market bottom. Their rationale was that they didn’t want to lose everything. But the reality was that they lost the ability to capture the rebound as the market recovered. Whenever you feel uncertain about your portfolio and investments, consider talking with your financial advisor before taking action.

If you would like to talk about the potential impact of higher rates on your financial situation, contact Sid at or 617.531.6954.


Sid Queler is the chief growth officer, with more than 30 years of industry experience. In this role, he leads the firm’s business development team, setting strategies and practices that broaden relationships with individuals, families, foundations and endowments. Sid also shares economic and financial insights in his biweekly  column, The Affluent Mind.

 1Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis. Federal Reserve Bank of St. Louis. Cited on December 19, 2022.
2 Daily Treasury Par Yield Curve Rates. U.S. Department of the Treasury. Cited December 20, 2022.
3 McCaffrey, Paul. Daniel Kahneman: Four Keys to Better Decision Making. Enterprising Investor. June 8, 2018.