American consumers who are struggling to keep pace with ongoing record high inflation, largely due to soaring costs for basic necessities, don’t want to hear about further suffering.
But Federal Reserve Chairman Jerome Powell warned last month that more economic malaise looms on the horizon and is expected to act on those guidance at Wednesday’s monetary body meeting.
Why do interest rates keep rising?
Powell and the Fed board are expected to levy a 0.75% increase in its benchmark lending rate on Wednesday, the third consecutive hike of this size and a series of moves that represent the fastest increases in decades. .
Speaking at the Fed’s annual economic symposium in Jackson Hole, Wyoming, in late August, Powell said the slight dip in US inflation in July was far from ample proof that price increases are truly in a down cycle. . And he warned consumers and business owners to expect more short-term economic challenges to avoid worse consequences in the future.
“While higher interest rates, slower growth and looser labor market conditions will reduce inflation, they will also hurt households and businesses,” Powell said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.
And while the headline annual inflation rate in the United States was 8.3% in August, down from July’s 8.5% rate and June 9’s 40-year high, 1%, core price increases that exclude volatile fuel and energy categories rose much faster than expected last year. month.
What is the impact of a higher interest rate on inflation?
The Fed’s rate hikes are aimed at raising the cost of debt, a way to help cool consumer spending and ultimately lower inflation by tackling demand. And, in some ways, these efforts are paying off.
Last week, mortgage rates broke through the 6% threshold and reached their highest level since 2008, increasing pressure on the US housing market and excluding even more potential buyers.
Freddie Mac predicts that high rates will continue to dampen US demand. Although the inventory of homes for sale is increasing, it still remains at “inadequate” levels, which means the decline in home prices will likely continue – but not fall off a cliff.
And, the average interest rate on credit cards reached 17.96% this month, the highest rate since 1996 according to Bankrate.com.
Ted Rossman, senior industry analyst at Bankrate, said MarketWatch that for those with credit card debt, that means your rate could fluctuate accordingly.
“Rate hikes typically affect new and existing balances,” Rossman said, adding that “most credit cardholders are now facing rates that are 225 basis points higher than they were a year ago. barely six months.
Is the Fed’s strategy working?
But, as the cost of a mortgage and consumer credit card debt rise, which is exactly the kind of results the Fed hopes to see, other consumer trends are offsetting the dampening effect of rate hikes.
These factors include a US job market that continues to operate at full capacity and consumer spending that remains strong.
Employers added 315,000 jobs in August according to the latest report from the US Department of Labor and the national unemployment rate climbed to 3.7%, from 3.5% in July, its lowest level in 50 years. Hiring is down from July’s 526,000 new hires, but August volume is still well above pre-pandemic rates, and job openings still far outnumber the workers available to fill them. .
Data from the Labor Department shows eight of 13 retail spending categories rose in August, per CNN. Spending at food and beverage retailers rose 0.5% for the month and rose 7.2% over the past year. Sales increased at restaurants and bars and at car dealerships jumped 2.8% on the month. Spending on building materials and equipment, clothing and sporting goods also increased.
Are we headed for a recession?
As the Fed meets on Wednesday, inconsistent economic signals will fuel another sharp rate hike, but Powell noted at the Jackson Hole conclave that “our decision at the September meeting will depend on the totality of incoming data and the changing outlook”.
While interest rates on consumer debt look likely to continue to escalate amid further Fed hikes, there’s also the looming prospect that the strategy could push the US economy into a prolonged economic downturn, aka a recession.
Last week, billionaire CEO Barry Sternlicht said CNBC that the US economy is on the verge of a serious slowdown if the Federal Reserve does not rein in its rate hikes.
Sternlicht said the Fed reacted too slowly when the first signs of rising inflation appeared and was now too aggressive in an effort to catch up.
“The economy is hitting the brakes hard,” the chairman and CEO of Starwood Capital Group told CNBC “scream boxThursday. “If the Fed keeps it up, they’re going to have a severe recession and people are going to lose their jobs.”