Analysts fear the Fed’s continued actions will result in a recession, high unemployment, and spiking payments for consumer loans and mortgages.
- Wednesday’s interest rate hike marked the 10th hike in 14 months and the highest rate since 2007, and the fastest rate of increasing rates since the 1980s.
- In the short term, the decision could lead to higher payments for consumer loans and mortgages, harming consumers, slowing down large purchases, and negatively impacting the economy.
- Fed Chair Jerome Powell noted that an economic slowdown is expected, saying they’re factoring in how tightening credit conditions are going to affect the economy.
- The serious risk of an artificial recession is drawing renewed bipartisan scrutiny toward the Federal Reserve, with Senator Elizabeth Warren (D-MA) calling the Fed’s moves dangerous.
Why It’s Important
The effect of interest rate hikes is that consumer borrowing costs are going to increase, which will trickle down and play out over the rest of the economy. Two of the most affected areas will be consumer loans and mortgages. Car loans, student loans, and credit card debt are all expected to incur larger payments. While mortgages are not likely to see fluctuations, home equity credit, and adjustable-rate mortgages could see more immediate effects, The New York Times notes.
It takes time for the effects of high-interest rates to trickle down into the pockets of the general public. As it does, it could result in large purchases becoming more expensive and less practical for consumers. This could result in reduced consumer spending and higher unemployment. The 20% interest rate hikes of the 1980s caused 10% unemployment levels, although the current range of 5% to 5.25% is nowhere near that.
The Fed is set to make a further announcement on June 14, which will either involve an 11th interest rate hike or an announcement that hikes have momentarily gone far enough to avoid severe economic damage.
Backing Up A Bit
The Fed has taken drastic action to address two years of rapidly rising inflation, which peaked in June at 9.1%. While the Fed initially dismissed inflation as “transitory,” it has since overcorrected and dramatically increased interest rates to slow the economy and reduce inflation to 2%, which it has not yet achieved with March’s rate of 5%.
As a rule, the Fed tends to hike rates until something important in the economy breaks, and it saw this in March with three successive and history bank collapses caused in part due to the bank’s failure to adapt to high-interest rates. It currently has incentive and political pressure to reduce its tightening while still meeting its mandate to address high inflation.
High consumer spending has continued to trouble analysts as they look at the current state of the economy. While a recession is likely, and the ongoing debt ceiling negotiations make one more likely in the event of a default, many economists have argued that a soft landing for the economy is possible or likely, due to the populace’s current resiliency and spending habits.
“It’s not like inflation is going to start cooling suddenly. But the economy will be cooling, and the banking distress will remain front and center, and that will add to the credit tightening the economy has to absorb,” MacroPolicy Perspectives President Julia Coronado tells The New York Times.