The US Federal Reserve (Fed) has sharply increased short-term interest rates to 75 basis points for the third consecutive time. The Fed's latest move has raised the benchmark interest rate to a range of 3% to 3.25%, the highest level in 14 years.
Regularly increasing interest rates make it increasingly expensive for American consumers and businesses to borrow to buy houses, cars and other purchases.
According to AP, there will almost certainly be more interest rate increases, with interest rates predicted to reach 4.4% by the end of the year. The Fed will not start cutting interest rates until 2024.
How does raising interest rates reduce inflation?
If inflation is defined as too much money and too few goods, then by making borrowing more expensive, the Fed hopes to reduce the amount of money in circulation, and eventually lower prices.
Which consumer group is most affected?
Scott Hoyt, an analyst at Moody's Analytics, said that anyone who borrows money to make a large purchase, such as a house, car or large appliance, will be affected.
"The new interest rate significantly increases your monthly payments and expenses. It also affects consumers with high credit card debt - the impact is immediate" - he said.
Hoyt noted that household debt payments, calculated as income ratios, are still relatively low despite recent increases. Therefore, even when loan interest rates increase steadily, many households may not immediately feel the burden of debt.
Im not sure interest rates are a top concern for most consumers right now. They appear to be more worried about groceries and what is happening at the gas station. Interest rates may be something complicated for consumers," said Mr. Hoyt.
How does credit card interest rate affect?
Even before the Fed's decision on September 21, credit card interest rates had reached their highest level since 1996, according to Bankrate.com. Credit card interest rates may continue to increase.
In the context of inflation, there are signs that Americans are increasingly relying on credit cards to maintain spending. According to the Federal Reserve, the total credit card balance has reached 900 billion USD, a record high, although this amount has not been adjusted according to inflation.
John Leer, chief economist at survey research firm Morning Consult, said the survey conducted by the company found that more and more Americans are reducing their savings and switching to using credit. Finally, rising interest rates may make it more difficult for those households to repay their debts.
Renting a house, buying a house or buying a car
auto loans are at their highest level since 2012, according to Greg McBride of Bankrate.com. Interest rates on new car loans may increase almost the same as the Fed's interest rate increase. Jessica Caldwell, CEO of Edmunds.com, said that could cause some lower-income buyers to leave the new car market.
Last week, mortgages with average fixed interest rates reached 6%, the highest in 14 years, meaning home loan interest rates were twice as expensive as a year ago.
mortgage rates are not always volatile in parallel with the Fed increasing interest rates, but mainly according to the expected yield on 10-year Treasury bonds. The yield on the 10-year Treasury note has reached nearly 3.6%, the highest level since 2011.
Daryl Fairweather, an economist at brokerage Redfin, shared that rental prices have increased by 11% compared to last year. However, the price increase has slowed down and some renters are moving to areas with more affordable prices.
Regarding home buying, if you have enough financial capacity to buy a house, you can have more options than at any time in the past year. Sales of new and existing houses have been falling steadily for many months.
Inflation drives interest rate increases
What prompted the Fed to raise interest rates was inflation. Over the past year, inflation has risen to 8.3%. Basic inflation, which excludes food and energy, also increased faster than expected.
Fed Chairman Jerome Powell warned last month that our responsibility to maintain price stability is unconditional, saying that the Fed would fight inflation by raising interest rates even if it led to job losses or economic recession.
The goal of this measure is to slow down consumer spending, thereby reducing demand for houses, cars and other goods and services, ultimately cooling the economy and lowering prices.
Impact on the job market
Some economists believe that widespread labor cuts are necessary to slow down price increases. One argument suggests that the tight labor market is driving higher wage and inflation. In August, the US economy had 315,000 jobs. There are about 2 job opportunities advertised for all unemployed workers.
Some say higher unemployment rates could ease wage pressure and curb inflation. Research published earlier this month by the Brookings Institution shows that the unemployment rate could have to increase to 7.5% to reduce inflation to the Fed's target of 2%.
