3 Ways the Fed's Fix for Inflation Will Hurt Your Everyday Life
The Federal Reserve’s decision Wednesday to raise interest rates for the first time since 2018 might hit everyday Americans almost as hard as the rampant inflation under President Joe Biden that it’s intended to fight.
In the tricky position of trying to fight inflation without sending the economy into a recession, the Fed raised its benchmark rate by a quarter of a percentage point, the Wall Street Journal reported — with more increases expected in the coming months.
The Fed’s target inflation rate for a healthy economy is about 2 percent. But in February, the annual inflation climbed to 7.9 percent, a rate not seen since 1982, Trading Economics reported.
This has spiked prices for all goods, across the whole economy.
The national gas price average Thursday was is $4.29, AAA reported.
Food prices have kept going up, and food at home increased 8.6 percent, according to Trading Economics; prices for shelter increased 4.7 percent.
All other goods minus food and energy increased 6.4 percent, the Bureau of Labor Statistics reported.
The Fed’s interest rate hike is aimed at slowing that down, Fed Chairman Jerome Powell said at a news conference, the Journal reported.
“The committee acutely feels its obligation to move to make sure that we restore price stability and is determined to use its tools to do so,” Powell said, according to the Journal.
“Across the economy, we’d like to slow demand so that it’s better aligned with supply,” he added.
Cutting inflation is, of course, a great goal. But whether the Fed’s hiked interest rates will help inflation or tip us into a recession will soon be found out.
Here is what the rise in interest rates means for individual Americans.
First, the rate increase will affect mortgage rates.
The historically low mortgage rates have been between 3 and 3.85 percent since the year started, Freddie Mac reported. These low rates over the past few years have fueled a hot housing market. But increasing interest rates will start to spike mortgage rates and house hunters will feel the bite.
Second, the interest rate spike will affect auto loans and the wallet of everyone looking for a new car.
Auto loans usually have a fixed interest rate that is pegged to Treasury yields, the Wall Street Journal reported. So those who already have fixed rates on their loans are fine. But those getting new loans for a car, are in a bit more trouble.
Then there are credit cards.
Credit card rates were already going up, as WalletHub reported that on average interest rates are over 18 percent.
Credit card rates normally hold pretty close to the Fed’s moves, so anyone with credit card debt can expect to start paying more, as The New York Times noted.
Overall, anyone who has any loan or credit with a variable rate can expect to see higher and higher interest rates throughout the rest of the year.
In the very immediate future, there may only be a handful of things that the Fed’s raised rates will impact for individuals.
However, in the bigger picture, the higher interest rates will begin hurting a large number of people. And if the rates are overshot, then the whole economy could be pushed into a recession.
Particularly since the Fed has penciled in more rate hikes throughout the rest of the year, there are concerns about over-correction that could tip the economy over, rather than heal its inflation problem.
The Fed’s raising interest rates might be necessitated by inflation, but these hikes could especially put a squeeze on the labor market, which could then become a factor in creating an overall recession.
Some businesses will have to either stop hiring, or perhaps lay off workers.
All this is in hope that the loss of jobs will be outweighed by the benefit of decreasing inflation.
“The hope is that the Fed can engineer the proverbial soft landing, whereby inflation returns to around its 2 percent goal and the economy remains strong without a substantial increase in unemployment,” former Harvard President Lawrence Summers, who was treasury secretary from 1999 to 2001 and an economic adviser to President Barack Obama, wrote in a piece published by The Washington Post on Tuesday.
Summers, who has been a vocal critic of the Biden administration for not paying enough attention to the dangers of inflation, was not optimistic the Fed’s new tactic will work.
“Anything is possible, and wishful thinking can sometimes prove self-fulfilling,” he wrote. “But I believe the Fed has not internalized the magnitude of its errors over the past year, is operating with an inappropriate and dangerous framework, and needs to take far stronger action to support price stability than appears likely.”
Whether the Fed — and the Biden administration — takes his advice remains to be seen. Either way, the Fed’s rate hike going to affect every American’s life.
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