The Federal Reserve has raised its key interest rate by 0.75% for the third time in a row as it scrambles to stay ahead of galloping inflation that is sapping US consumer earnings.
Earlier this month, the Bureau of Labor Statistics reported that inflation had risen 8.3% year-on-year and 0.1% monthly. Both figures came in higher than analysts had expected, raising fears that inflation is becoming entrenched.
The crux of the problem is that demand in the economy is still too high amid a global supply shortage. Thanks to restrained spending during Covid lockdowns and federal stimulus plans, consumers came to terms with cash as the economy began to reopen. Meanwhile, Covid supply chain problems continued, and the Russian invasion of Ukraine reduced access to both food and energy in other parts of the world.
So the Fed is trying to bring demand back into line with supply. By raising interest rates, the Fed hopes to curb consumption and borrowing, which in turn should put downward pressure on prices. However, this comes at the expense of a slowing economy.
“The Fed has issued a tough love message that interest rates will be higher, and longer than expected,” Bankrate.com’s Greg McBride wrote in a note released Monday. “The Fed will continue to raise interest rates until it actually curbs the economy and plans to keep rates at those restrictive levels until inflation is clearly headed for 2%.”
Higher rates, and as a result the slowing economy, are likely to translate into higher unemployment. This week, Deutsche Bank told Bloomberg News it now projects the U.S. unemployment rate to rise nearly a full percentage point to 4.5% — meaning hundreds of thousands more Americans will be looking for work in the next 12 months. Last month, Fed Chair Jerome Powell gave a speech forecasting this outcome, saying the higher rates would “hurt households and businesses some,” something he said as “the unfortunate cost of curbing inflation.”
Still, the labor market remains historically strong, prompting others to argue that unemployment doesn’t need to rise that much. In a note to customers Monday, Goldman Sachs chief economist Jan Hatzius predicted that it would take until 2024 for the unemployment rate to reach 4.2%.
“The labor market remains tight and workers continue to benefit from very favorable job prospects, mainly due to the fact that the total number of jobs remains 5.2 million above the total number of employees,” he wrote.
One area where higher interest rates are taking a big bite is housing. In an email to customers Monday, Ian Shepherdson, chief economist at research group Pantheon Macroeconomics, said nine consecutive declines in the National Association of Home Builder’s index of home builders and sentiment indicate the home market is now in a “deep recession.” ” is located. As a result, he said, the Fed is unlikely to continue its aggressive pace of walking going forward.
“However, the longer and deeper the housing recession gets, the greater the pressure it will put on the Fed to reverse the pace of tightening,” Shepherdson wrote.
Bankrate’s McBride has provided some financial advice Americans should keep in mind as interest rates rise.
“Given the environment of rising interest rates and a slowing economy,” he said, “the financial steps that households need to take are to encourage emergency savings, pay off high debt and maintain contributions to, and a long-term perspective on, retirement accounts. “