- Unless you've been living under a rock, you might have noticed the economic landscape has dramatically shifted under our feet.

The COVID 19 pandemic shook the very foundations of the global economy, and as a result of many complicated factors, prices on the whole started to rise in response.

Cue inflation.

- Now, there's nothing new under the sun, but to be fair, most of you watching this weren't even born the last time this happened.

As we've explained previously, there was a similar hike in inflation back in the seventies and eighties.

In response, the government raised interest rates quickly and severely.

Inflation was tamed, but it had the nasty side effect of a crippling recession.

- Naturally, when the Fed said it would do something similar, many were spooked that we would suffer the same fate.

After peaking in June of 2022 at 9%, inflation plummeted back down to 3.2% just over a year later.

That's almost back to pre COVID levels.

- Thankfully, the sky doesn't seem to be falling, but we all know there's no such thing as a free lunch.

So how have higher interest rates really changed things?

(upbeat music) You know how in winter your house might seem warm and toasty at 70 degrees, but in the summer that same temperature makes you wanna search for your sweater.

This is because humans are very sensitive to contrast.

One of the reasons people were so freaked out about interest rates changing was how incredibly low they had been coming into this situation.

- Since 2008, rates have been kept super low as the Fed tried to cushion the blows of the 2008 recession and the 2020 COVID pandemic, but this was not really how it was supposed to be.

Roger Ferguson, a former vice chair of the Federal Reserve, put it like this.

"Having interest rates at zero for such a long period of time is very unusual.

Frankly, no one ever thought we'd get to that place."

- It's important to note that interest rates did not go up because the Federal Reserve has a volume button across the whole economy, they actually only directly control a few things.

Probably one of the most pivotal is its open market operations, which affects the federal funds rate or overnight rate.

This is the interest rate at which banks lend money to each other usually for a very short time, AKA overnight.

The price of these loans is really important because they're often the cheapest money a bank will have access to.

- Its function is to make sure that banks have enough asset reserves on hand to meet the federal minimums.

It sort of reshuffles surpluses and deficits around.

For example, if a bank in Florida experienced a ton of withdrawals because a hurricane ripped through, a bank in Alabama could lend them their surplus and so on.

- The Fed doesn't set a specific number, but rather a target range.

And from March of 2022 to May of 2023, the federal funds target rate increased tenfold.

This hike in consumer credit interest rates across the board prompted people to hold off on buying bigger ticket items.

Normally this would be a bad thing, but the Fed was actually counting on this.

The less people buy, the more the economy shrinks, and in theory, the more inflation is curbed.

But how has this all worked out so far?

- Well, some industries felt the pain almost immediately.

Smaller banks like Silicon Valley tech companies and startups reliant on investors ended up folding or cutting thousands of jobs.

This is mostly because when interest rates are low, low risk things like bonds and CDs don't pay very much.

So investors across the board seek higher returns from higher risk investments like stocks.

But when rates rise, the value of lower risk investments go up due to higher payouts and shifting demands.

After all, why take risks if you don't have to?

- And it's not just big companies feeling the pinch.

A recent survey found that 63% of business owners reported that higher rates had a negative impact on their business.

This is particularly true for the little guys.

Believe it or not, 99.9% of businesses in America are considered small.

Their employees make up about 46% of the private workforce and drive an estimated 44% of economic activity.

Owners of small businesses who use credit to run their operations typically have to rely on far more expensive types of debt like personal loans and credit cards.

- While this might not threaten established profitable businesses or those with pre COVID fixed rate loans, it makes things like hiring new people and expansions far more challenging.

It also makes it a lot harder to start something new.

The acceptance rates of small business loans, both public and private, has been cut in half since 2019, and it wasn't particularly high to begin with.

- Another place we've seen a massive shift is real estate.

Mortgage rates are at the highest point in decades.

Average payments topped out at around $2,300 a month midyear.

Normally, higher payments would lead to buyers becoming scarcer, followed by a drop in housing prices, which many would welcome given the massive price spike we saw in the early stages of COVID and prices did retract for about six months, but as of now, prices are back to where they were a year ago.

Current homeowners are sitting pretty unless they really need to move, and even if they do, they can take advantage of the sky high rental market and become landlords.

- This is mostly because the rate hike is coinciding with a chronic housing shortage.

Buyers are having a hard time finding affordable loans, and sellers are reluctant to let go of their existing mortgages at pre COVID rates.

While this doesn't seem to have led to a market crash, there is stagnation.

We're currently on track for the worst year of home sales since 1993.

Thankfully though, it does seem like rates will be easing back down a bit in 2024.

While we probably won't see the sub 3% world again, it will hopefully be a slightly lower barrier of entry to those chomping at the bit on the sidelines.

- And it's not just home sales themselves are contracting.

Industries related to real estate like storage companies, furniture makers, home improvement stores are also feeling the crunch after the boom of early COVID sales.

Service industries like realtors, loan officers, contractors, title companies, appraisers, inspectors are all seeing a massive drop in business.

- Now while borrowing money has become more expensive, having money has become far more profitable.

The days of the 0% savings account are over.

Banks, especially online ones are facing pressure to attract new customers so they can turn around and invest them in loans and bonds.

Many of them are offering upwards of four to 5% guaranteed return on cash.

That would've been unthinkable just a few years ago.

Again, more good news for those in the enviable position of having assets before all this started, - Overall, many experts expected higher interest rates to have exacted a much higher toll on the economy, but there has been a price paid by those who had the least coming into the game.

First time home buyers, new car buyers, prospective business owners, are all having to sit on their heels now that prices have elevated.

Those on the margins are having it worst of all, with tighter credit and stubbornly elevated pricing on essentials like food, housing, and transportation.

So what's a regular person to do with all of this?

- First off, make sure that cash you don't need in the next three months is in a high yield account of some kind.

A lot of the bigger banks aren't hopping on this bandwagon because they don't have to.

It's worth it to check around and see what better deal you can score.

If you're looking to take out debt for a non-essential, it's probably best to wait.

That car can probably hang on a few more months.

- Looking at cute houses on Zillow might still be the visual ASMR that you crave, but it's best to cool it until we find out more about what the Fed plans to do later this year.

It is true that generally you are able to refinance things if rates change down the road, but that costs money and many loans have a waiting period before you're able to do it.

- On some level, it is impressive how resilient the economy has remained in the face of massive change, but there's still a good amount of uncertainty as to how long these rates will stay in place as is.

- Bottom line, a lot has changed in a short period of time, but now is not the time to be paralyzed with fear over financial decisions.

Calculated confidence is where it's at.

- [Both] And that's our 2 cents