On March 16th 2022, the Federal Reserve approved a 0.25% rate hike. This is the first increase since December 2018, after two long years of the Covid pandemic with extremely low rates.

Although most of us heard of interest rates before, we hardly understand the implications of increasing or decreasing rates.

The interest rate is a percentage which a lender charges a borrower from the principal amount. Say you borrow money from a bank and it charges you 3% per annum – that’s the extra you have to pay apart from your borrowed amount.

Interest rates apply to a variety of lending or borrowing transactions. That’s because we borrow money for literally everything – to purchase homes, buy cars, fund businesses, pay for college tuition or your Starbucks. Majority of the world’s money right now is in the form of debt.

A country’s central bank (or the Federal Reserve in the U.S.) sets the interest rates. Like a switch, they can raise or lower it any time they deem necessary.

Logically, it would be more encouraging to take a loan when the interest rates are low. Low rates encourage spending, it leads to more earnings and productivity, because more money is created.

With much more money circulating in the economy, it creates more demand (instead of buying a regular car, you go for a fancier one instead). This effect cascades, causing demand to outpace supply, and when that happens, prices increase. This process is known as inflation.

This effect works in reverse when the Federal Reserve raises interest rates. It discourages loans, which leads to less spending and less earnings. The economy shrinks.

So to summarize everything up:
– Lowering interest rates lead to more inflation.
– Raising interest rates slows down or tapers inflation.

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*This video is for entertainment purposes only. I am not a financial/legal advisor.

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Inflation is a term used to describe the rate at which the general level of prices for goods and services is rising, leading to a decrease in the purchasing power of a currency. Essentially, inflation means that your money is worth less over time.

There are several factors that can contribute to inflation, including increased demand for goods and services, rising production costs, or changes in government policies. When there is too much money circulating in the economy without a corresponding increase in goods and services, prices tend to rise.

Inflation can have both positive and negative effects on the economy. On one hand, moderate inflation can encourage spending and investment, leading to economic growth. On the other hand, high inflation can erode the value of savings and fixed incomes, making it harder for people to afford basic necessities.

In order to protect against the negative effects of inflation, many investors turn to alternative assets like cryptocurrencies. Cryptocurrencies, such as Bitcoin, are decentralized digital currencies that are not controlled by any government or central bank, making them a popular choice for those looking to hedge against inflation.

In conclusion, inflation is a crucial concept to understand when it comes to managing your finances and investments. By staying informed and taking proactive steps to protect your wealth, you can navigate the ups and downs of the economy with confidence.