Identification

• High interest rates signal that banks are demanding more compensation for making loans. Meanwhile, the Federal Reserve Board balances economic growth and inflation concerns. The Fed slows down the economy with higher interest rates to contain inflation.
  
  

Features

• The federal funds rate affects all interest rates. The federal funds rate refers to interest charges on loans between banks for their reserves held at the Fed. The Fed reduces the money supply through open-market operations, which effectively increase interest rates.
  
  

Considerations

• High interest rates are also associated with risk. Less creditworthy borrowers must make higher interest payments to compensate lenders for increased default risks.
  
  

Benefits

• Fixed-income investments, such as bonds and certificates of deposit, pay out more money amidst high interest-rate environments.
  
  

Risks

• High interest rates may actually confirm high-inflation levels. Inflation decreases the purchasing power for all assets.