Fed policy makers know they have to start raising interest rates given the low unemployment rate and inflation at 40-year highs. And they decided to move even though the wisest course of action might have been to delay until the impact from the war in Ukraine on the U.S. economy is more clear. The obvious question for consumers is, okay, higher prices are already straining our wallets, how is increasing borrowing costs going to stomp down inflation?
“The market has anticipated these rate hikes because the federal reserve has done a great job of telling people they’re coming,” said Joe Krier a financial analyst with IIWII Trading. “But you know, if you have $25,000 of unsecured debt, you’re going to pay about $3 more a month. And that doesn’t seem like a lot, but if the Fed raises rates seven times this year, then you’re going to have things adding up on you,” Krier said.
The Feds main tool in battling inflation is interest rates. This move will impact a variety of things. Credit card interest rates will rise. It will mean higher prices for people taking out auto loans. Expect higher mortgage interest rates which are already ticking upward. It will also lead to higher interest rates on student loans.
Krier says it may also have an indirect impact on supply chain issues.
“The whole point of this is to slow down activity before prices get too far out of control,” said Krier. “And (the) supply chain is a big part of that. If interest rates are higher, anybody who borrows money, shipping companies as a good example, usually carry a lot of adjustable rate debt. So, their cost of bringing the goods to the grocery store goes up and that gets passed onto the consumer. It’s kind of a perfect storm,” he said.
The school of thought, according to economic analysts, is that with the Fed making borrowing more expensive it will discourage investments. That will lead to less demand and may hold down prices.