What Causes Interest Rates to Rise?

 The liberty principle for this Freedom Friday concerns high interest rates. There are some Americans who believe that the federal government should cover non-governmental costs – such as to forgive student loan debts and to help people with living expenses. The federal government has had runaway spending for decades and is now borrowing trillions of dollars.

This will be a problem for future Americans, but it also causes interest rates to rise. This includes interest rates on credit cards, student loans, vehicle loans, and home mortgages. The U.S. government went on a spending spree, and Americans are paying the bill. Members of both parties are responsible for the spending spree. E.J. Antoni, a public finance economist and research fellow at The Heritage Foundation, published an article are the spending problem. 

The runaway spending in Washington has been a problem for decades, but it got a violent shove into overdrive during the past several years. The Biden administration and its big-spender allies in Congress – from both parties – have already racked up $6.8 trillion of additional debt. And that money had to come from somewhere.

For the first couple years of the Biden administration, it came from the Federal Reserve, which simply created the money. That devalued the currency and caused 40-year-high inflation. When the Fed stopped its printing presses, however, the Treasury had to borrow from the public.

That forced interest rates on Treasury bills, notes, and bonds to rise – and fast. Many Treasury yields have quadrupled in less than four years. Some yields have increased 75-fold. The reason is simple: The Treasury is competing with everyone else to borrow trillions of dollars annually.

You may not realize it, but when you apply at a bank for a mortgage, or online for a credit card, or at a dealership for an auto loan, you’re actually competing to borrow money. A lender has many options when it comes to lending out his money. And that means loan pricing is a competitive process.

We call the price to borrow money the interest rate. A higher interest rate means it’s more expensive to borrow, while a lower interest rate reduces the cost of borrowing.

When the demand for money goes up, the price also rises. This means that interest rates also rise. Those who have the ability to pay higher interest rates will get loans, while people with less money to pay higher interest rates will receive nothing.

In addition to higher interest rates, Americans are also dealing with 40-year-high inflation, which increased the cost of living for most people. Many people used savings to cover living costs, which lowers the amount of money available to borrow. They are also putting more living costs on their credit cards, which results in higher balances to repay. According to Antoni:

The result has been a tripling of mortgage interest rates for many borrowers, record high interest rates on credit cards, and the highest student and auto loan interest rates in more than a decade….

The high borrowing costs punishing American families are here to stay as long as Congress continues its breakneck pace of deficit spending. Until that stops, the Treasury will continue sucking all the oxygen out of the room, while American families suffocate financially.