Posted on 03/17/2022 8:52:28 AM PDT by Red Badger
Rate hikes are projected to help reduce inflation -- but don't expect high prices to drop any time soon.
In response to accelerating inflation, the Federal Reserve announced Wednesday that it will raise interest rates by 0.25 percentage points for the first time since 2018. The Fed also projects six additional rates hikes throughout 2022. Raising interest rates is a key step to combatting skyrocketing inflation, which is at a 40-year high, and will jumpstart the process of rate increases for credit cards, mortgages and other loans.
Although raising rates is designed to curb inflation, Fed Chairman Jerome Powell acknowledged that he still expects inflation to run high through the rest of this year.
"We understand that inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials, like food, housing and transportation," Powell said in a press briefing. "The expectation is that inflation will come down in the second half of the year, and begin to come down more sharply next year."
With rates rising and more increases on the way, what's next? I'll walk you through how this happened, what the Fed is doing about it and what rising interest rates mean for you.
What is inflation and how high is it today? High inflation means your dollar has less purchasing power, making everything you buy more expensive even though you're likely not getting paid more. In fact, more Americans are living paycheck-to-paycheck, and wages are not keeping up with inflation rates.
Inflation surged last month, increasing 7.9% over the past 12 months and reaching its highest level since January 1982, according to the Bureau of Labor Statistics. Gas prices also reached their highest recorded average of $4.31 per gallon last Thursday, with grocery prices following suit, hitting their highest increase since April 2020.
Though the immediate impacts of COVID-19 on the US economy are easing up, the supply and demand imbalances persist, one of the main contributors to swelling prices. Russia's war on Ukraine -- which threatens political and economic stability worldwide -- is another key driver of skyrocketing gas prices. The cost of fuel has been so volatile that it accounted for nearly one-third of February's overall price increases.
Why did inflation get so bad? We're here because of the pandemic.
In March 2020, the onset of COVID-19 caused the US economy to shut down. Millions of employees were laid off, many businesses had to close their doors and the global supply chain was abruptly put on pause. This caused the flow of goods shipped into the US to cease for at least two weeks, and in many cases, for months, according to Pete Earle, an economist at the American Institute for Economic Research.
But the reduction in supply was met with increased demand as Americans started purchasing durable goods to replace the services they used prior to the pandemic, said Josh Bivens, director of research at the Economic Policy Institute.
"The pandemic put distortions on both the demand and supply side of the US economy," Bivens said. "On the demand side, it channeled tons of spending into the narrow channel of durable goods. And then, of course, that's the sector that needs a healthy supply chain in order to deliver goods without inflationary pressures. We haven't had a healthy supply chain overwhelmingly because of COVID."
This increased demand combined with the supply chain kinks induced inflation, which has persisted since the 2021 reopening of the economy.
That noted, inflation isn't inherently a good or bad thing. Moderate and steady inflation is actually important for a healthy economy: It promotes spending since rising prices encourage consumers to buy now, rather than later, keeping demand up. Inflation can become a problem when it rises over 2% (as measured by the Fed) and when it rises rapidly. That messes with healthy consumer spending and, in extreme cases, can derail price stability.
What is the Fed doing about inflation? With inflation hitting record highs, the Federal Reserve, the government body in charge of keeping inflation in check, has been under a great deal of pressure from policymakers and consumers to get the situation under control. One of the Fed's primary tenets is to promote price stability and maintain inflation at a rate of 2%. To counteract inflation's rampant growth, the Fed raised the federal funds rate by a quarter of a percentage point this week.
The federal funds rate is the interest rate that banks charge each other for borrowing and lending, usually on an overnight basis. By raising this rate, the Fed effectively drives up interest rates in the US economy.
Raising interest rates helps slow down the economy by making borrowing more expensive. In turn, consumers, investors and businesses pause on making investments, which leads to reduced economic demand and theoretically reels in prices. In short, this helps balance the supply and demand scales, one cause of inflation that was thrown out of whack by the pandemic.
The Fed, which calculates inflation differently than the CPI, estimated inflation was at 6.1% as of Jan. 2022. The typical Federal Open Market Committee member -- the Fed's policymaking body -- projects this number could decrease to 4.3% by the end of 2022, following a series of rate hikes.
What do rising interest rates mean for you? Raising interest rates will make it more expensive for both businesses and consumers to take on loans. For the average consumer, that means buying a car or a home will get more expensive since you'll be paying more in interest.
For the past two years, interest rates have been at historic lows, partially because the Fed slashed interest rates in 2020 to keep the US economy afloat in the face of lockdowns. Since then, the Fed has kept interest rates near zero, a move made only once before during the financial crisis of 2008. Prior to the Fed's recent rate hike, interest rates had already started rising in 2022. For example, 30-year fixed mortgage rates, while still historically low, are returning to pre-pandemic levels.
Increasing rates could make it more difficult to refinance your mortgage or student loans at lower interest rates. Moreover, the Fed's move will also drive up interest rates on credit cards, ratcheting up minimum payments along with it.
Should you be worried about inflation? While inflation is top of mind for many Americans, experts don't think hyperinflation is a concern right now.
The Fed took initial steps to counteract inflation by reducing its bond-buying program by $15 billion monthly in November 2021, a rate which was increased to $30 billion in order to accommodate potentially raising interest rates sooner than planned -- which is exactly what the Fed did this month.
And though this rate hike is expected to help bring down inflation, there's still a concern on the table, as another six rate hikes are expected this year. If the Fed overreacts by raising rates too high, it could spark an economic downturn, or worse, induce a recession.
Raising rates too quickly may hinder consumer demand too greatly and unduly stifle economic growth, potentially leading businesses to lay off workers or stop hiring. This could drive up unemployment, which would lead to another problem for the Fed as it is also tasked with boosting employment.
Powell acknowledged that the Fed will raise interest rates more aggressively if necessary. "The more radical and the more quickly [the Fed] moves, the more they tempt the randomness that comes with the uncertainty of the market and the prospect that we may see a nasty recession," Earle said.
That noted, adjusting the federal funds rate by quarter intervals is the typical move for the Fed, according to Earle. St. Louis Fed President James Bullard, favored a more aggressive tactic of raising the target range for federal funds by 0.5 percentage points, but the Fed ultimately took the more conservative approach, temporarily quelling fears that the Fed would raise rates too high, too soon.
We'll keep you updated on the evolving economic situation as the Fed moves forward with more rate hikes this year.
First published on March 10, 2022 at 4:15 a.m. PT.
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Banking Loans Investing Ukraine-Russia War
A lousy quarter point.
It starts...
Increase the oil supply to lower prices across the board for the average person.
A quarter point here, a quarter point there, pretty soon your talking about real integers......................
A quarter point here, a quarter point there, pretty soon your talking about real integers......................
“Why did inflation get so bad? We’re here because of the pandemic.”
Total BS by an ignorant author. We are here because of one reason and one reason only — power-mad and power-hungry government sending out “free money” to everybody. It was totally not needed if they hadn’t shut down the world in a futile attempt to stop the unstoppable.
Inflation is sooooo bad, leprechauns are buying gold.................
The Green Meanies say we can’t do that. I say f ‘em.
I might earn something on my savings. Great.
Doesn’t increasing interest rates distort the borrowing and lending of money?
Ive sometimes heard that interest rates fluctuate based on supply and demand for money. But it sounds like they are fixing interest rates, and that the free market for borrowed money doesn’t really exist.
Rising interest rates affect everything, even your food, utilities and insurance costs..............
Yep, not a word about printing money and handing it out.
The Covid shutdown was 100% the wrong thing to do.
Yes, inflation may be over 10%.
> A lousy quarter point. <
Sort of like shooting at a charging elephant with a water pistol. But, hey. Those Fed guys are all geniuses. I know that because that’s what the media says. So who are we to question them?
Yep. Higher costs passed on.
Covid did NOT cause the economy to shut down. Idiotic bureaucrats shut down the economy.
And quarter point. Whoo hoo. That should stretch this out another decade. But maybe my saving will go from a great .01% interest to .011% interest. Time to buy some CDs...
Yay. We will earn an extra .001% on our savings that have lost 50% of it’s value.
Powell said in a press briefing. “The expectation is that inflation will come down in the second half of the year, and begin to come down more sharply next year.”
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The same experts were claiming inflation was “transitory” last year.
“I might earn something on my savings. Great.”
6-9 month Treasuries beat the going Money Market rates right now because of no federal taxes on Treasuries. Started building my ladder and will continue as rates rise.
Everybody is screaming that the FED is either doing too much or not enough, so that plays into my feeling that they are doing just fine given what they’ve been handed by an overspending govt for years.
The FED is like the weather, after the screaming you still have to either put on your coat or put on your shorts.
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