By now, the fact that inflation is at a forty-year high is old news, and it seems unlikely that will change anytime soon, despite interest rate hikes from the Federal Reserve. While there is little hope that the Fed's recent 0.75% hike on its benchmark rate will calm inflation, the change is expected to impact everyday consumers' wallets.
Beyond raising rates, there isn't much that the Fed can do to control inflation. The idea is that higher prices are caused by strong demand, so, by raising rates and making things more expensive, the Fed is hoping to drive down consumer spending.
"The Federal Reserve got inflation wrong," Aaron Klein, a senior fellow at the Brookings Institution, told NPR in an interview. "And now they're trying to correct their mistake by pretty quickly hiking interest rates. And that will slow the economy."
When the benchmark interest rate is increased, interest rates across the board are affected. That includes everything from credit cards and loans to everyday business operations.
"With inflation being as high as it is and seeing some softness in the U.S. economy, the Fed really has a very delicate balancing act this month and for the next couple of months," Dave Sekera, the chief U.S. market strategist at Morningstar, told NPR.
Specifically, economists are concerned about the impact this rate hike will have on an already strained housing market. Home prices are on the rise, and mortgage rates are also being driven up by inflation. Since the beginning of 2022, mortgage rates have nearly doubled, shooting up from 3.29% to more than 6%.
With prices shooting up so quickly, buyers on every level are being bumped down, with first-time homebuyers on the bottom rung being squeezed out entirely. As a result, these would-be buyers are taking up space in the rental market, driving up rental prices, as well.
So far, economists disagree about whether or not housing prices are heading towards a stable point or a crash.
"I would say, if you're a homebuyer, a young person looking to buy a home: You need a bit of a reset," Federal Reserve Chairman Jerome Powell said at a press conference following the June 15 rate hike meeting. "We need to get back to a place where supply and demand are back together and where inflation is down low again and mortgage rates are low again."
While things are probably only going to get worse for home buyers thanks to the Fed's hike, Americans with money in savings accounts can look forward to seeing better rates. The Fed's low rates for the last few years have kept banks' interest rates low, as well, with the average interest rate on savings accounts staying at around 0.06%.
With the benchmark on the rise, you can already find banks offering interest rates of 1% or more on savings accounts, with internet banks leading the pack. However, keep in mind that the rates banks offer depend on more than just the Fed benchmark, so your rates may not see such a significant bump.
Raising the benchmark might help savings account owners and I bondholders, but not so much the rest of us. The Fed hopes to decrease consumers' willingness to spend money, without triggering a recession. However, the agency holds no control over some of the largest driving forces behind inflation, namely the Russian invasion of Ukraine and the last effects of the pandemic.
"I think that what's becoming more clear is that many factors that we don't control are going to play a very significant role in deciding whether that's possible or not," Powell told the press. "It's not going to be easy."
Many economists now believe that the Fed's success is unlikely. A recent survey of economists published by the Financial Times and the University of Chicago showed that the majority of respondents believe a recession will begin in 2023. In a client note on June 16, Wells Fargo
"Indications that inflation is becoming more entrenched in the U.S. economy has caused the Federal Reserve to become even more hawkish," the note reads. "We now judge that recession next year is more likely than not."
If a recession hits, many Americans could lose their jobs while still facing inflated prices for necessities like food and gas, and the existing hunger crisis in the U.S. would worsen.
Powell has said that the Fed isn't "looking to have a higher unemployment rate", but added that he would "certainly" view an increase in unemployment from the current 3.6% rate to a forecasted 4% rate "as a successful outcome."
"It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all," Powell told reporters.
If the Fed's hike is successful, experts say it could take a year for us to see the full results, ideally meaning a return to normal levels of inflation and unemployment, and a balance between wages and consumer demand.
However, many feel that consumers are being targeted as the scapegoat for inflation, with the brunt of higher rates being borne by everyday Americans who are already the hardest hit by inflated prices. While some have blamed higher wages for inflation, others point to skyrocketing corporate profits as proof that businesses can afford to raise pay without raising prices.
