America’s central bank has for decades been what Paul Volcker, its chair in the 1980s, called “the only game in town” when it comes to fighting inflation. While there are things that elected leaders can do to combat rising prices — raising taxes to curb consumption, spending more on education and infrastructure to improve productivity, helping flailing industries — those targeted policies tend to take time. The things that elected policymakers can do quickly generally help mainly around the edges.
What the Fed’s Rate Increases Mean for You
Card 1 of 4
A toll on borrowers. The Federal Reserve has been raising the federal funds rate, its key interest rate, as it tries to rein in inflation. By raising the rate, which is what banks charge one another for overnight loans, the Fed sets off a ripple effect. Whether directly or indirectly, a number of borrowing costs for consumers go up.
Consumer loans. Changes in credit card rates will closely track the Fed’s moves, so consumers can expect to pay more on any revolving debt. Car loan rates are expected to rise, too. Private student loan borrowers should also expect to pay more.
Mortgages. Mortgage rates don’t move in lock step with the federal funds rate, but track the yield on the 10-year Treasury bond, which is influenced by inflation and how investors expect the Fed to react to rising prices. Rates on 30-year fixed-rate mortgages have climbed above 5 percent this year, according to Freddie Mac, up from closer to 3 percent for most of 2021.
Banks. An increase in the Fed benchmark rate often means banks will pay more interest on deposits. Larger banks are less likely to pay consumers more, and online banks have already started raising some of their rates.
But time is of the essence when it comes to controlling inflation. If price increases run fast for months or years on end, people begin to adjust their lives accordingly. Workers might ask for higher wages, pushing up labor costs and prompting businesses to charge more. Companies might begin to believe that consumers will accept price increases, making them less vigilant about avoiding them.
By making money more expensive to borrow, the Fed’s rate moves work relatively quickly to temper demand. As buying a house or a car or expanding a business becomes pricier, people pull back from doing those things. With fewer consumers and companies competing for the available supply of goods and services, price gains are able to moderate.
Unfortunately, that process could come at a hefty cost at a moment like this one. Bringing the economy into balance when supply is constrained — cars are hard to find because of semiconductor shortages, furniture is on back order, and jobs are more plentiful than laborers — could require a big decline in demand. Slowing the economy down that meaningfully could tip off a recession, leaving workers unemployed and families with lower incomes.
Article source: https://www.nytimes.com/2022/07/27/business/economy/interest-rate-inflation-impact.html
Speak Your Mind
You must be logged in to post a comment.