The winners and losers of the Fed’s interest rate hike: NPR

With inflation still very high, the Federal Reserve announced on Wednesday that it would raise interest rates by 0.75%, the biggest increase since the 1990s.

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Spencer Platt/Getty Images

With inflation still very high, the Federal Reserve announced on Wednesday that it would raise interest rates by 0.75%, the biggest increase since the 1990s.

Spencer Platt/Getty Images

The Federal Reserve raised its benchmark interest rate by 0.75%.

But what does that really mean for hundreds of millions of Americans – Americans who have jobs, who buy things, who have bank accounts?

In short, interest rates are the Federal Reserve’s primary tool for fighting inflation. Inflation is driven by strong consumer demand. By raising interest rates, which makes things more expensive, the Fed hopes to dampen Americans’ willingness to spend money.

“It’s critical that we get inflation down if we’re going to have a sustained period of good labor market conditions that benefits everyone,” Federal Reserve Chairman Jerome Powell said at a conference in press after Wednesday’s meeting.

And the Fed will continue to raise rates as needed throughout the year if inflation doesn’t come down, Powell said. Its next meeting will take place at the end of July.

“The Federal Reserve got inflation wrong. And now they’re trying to correct their mistake by raising interest rates pretty quickly. And that will slow the economy down,” said Brookings senior researcher Aaron Klein. Institution, in an interview with NPR. .

Generally speaking, when the Federal Reserve raises its benchmark interest rate, everything else in the economy that involves interest rates is affected – and that’s most things: credit cards, loans students, home and auto loans, banking, savings accounts, day-to-day business operations, you name it.

That means the stakes are high when the Fed raises rates, as it did on Wednesday.

“With inflation as high as it is and seeing some weakness in the US economy, the Fed really has a very delicate balancing act this month and for the next two months,” said strategist Dave Sekera. in chief of the American market at Morningstar.

Losers: people trying to buy a house right now

The Fed’s interest rate is not directly tied to mortgage rates. But mortgage lenders raise and lower rates partly based on what they expect from the Fed.

With inflation so bad right now, mortgage rates have been rising all spring.

Today, the 30-year average rate is well over 6%, according to Mortgage News Daily. Earlier this year, a 30-year fixed rate mortgage could be had for around 3.25%.

Given a $400,000 loan, rising interest rates turned a monthly mortgage payment of about $1,700 into one approaching $2,500 in just a few months.

“Housing is becoming less affordable for everyone across the board,” said Daryl Fairweather, chief economist at Redfin.

This rapid increase in costs has already shut some potential buyers out of the market. Mortgage applications for buying a home in June are down more than 15% from a year ago, according to the Mortgage Bankers Association.

(Mortgage rates have always been higher, especially in the 1980s when rates topped 15% as part of the Fed’s efforts to fight 1970s inflation. But house prices are now higher. higher than ever, having increased dramatically in many areas over the past two years. .)

Economists have mixed views on what all of this means for the housing market. Some say house prices will remain stable; others predict lower prices.

At today’s Fed meeting, Powell suggested that potential buyers wait to see if prices stabilize.

“I would say, if you’re a home buyer, a young person looking to buy a home: you need a bit of a reset. We need to get back to a place where supply and demand are together again. and where inflation is down again and mortgage rates are down again,” he said.

Winners: people who have money in savings accounts

This one is modest, but remarkable. With interest rates so low over the past few years, banks had little reason or leeway to offer meaningful interest rates on personal savings accounts, where you could keep money. money for your emergency fund or a down payment.

Since the start of the pandemic and the Fed’s interest rate cut, the average interest rate for a typical savings account has hovered around 0.06%, according to the FDIC.

Now, with the Fed’s benchmark rate rising, interest rates are also rising. Some banks, especially online banks, are starting to offer interest rates on savings accounts of 1% or more.

It is important to know that the Fed rate is not the only factor banks consider when setting interest rates. Banks also take into account the amount of cash deposited by customers and the amount offered by competitors. So don’t expect to see rates increase by 0.75%.

And, of course, these interest rates remain below current inflation rates, which means that the real value of these savings will continue to decline over time.

But for people who need access to savings without risking a stock market crash — like emergency funds or a down payment for a new house or car — 1% is better than nothing.

Other savings vehicles that offer a combination of affordability and growth rates, such as CDs and I Bonds, also offer higher returns than in previous years.

Federal Reserve Chairman Jerome Powell during his Wednesday press conference.

Olivier Douliery/AFP via Getty Images

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Olivier Douliery/AFP via Getty Images

Federal Reserve Chairman Jerome Powell during his Wednesday press conference.

Olivier Douliery/AFP via Getty Images

Losers, most likely: all of us, in the short term

At the heart of Wednesday’s interest rate hike is a tightrope walk: the Fed is trying to slow inflation without triggering a recession and the layoffs that would come with it.

But even with the Fed’s thumb on the scales, some of the drivers of inflation are beyond the control of officials. The war in Ukraine, for example, has helped drive up oil and commodity prices, along with the continued supply chain disruptions caused by the pandemic.

As a result, inflation remained high. And that makes walking the Fed tightrope more difficult.

“I think what’s becoming clearer is that a lot of factors that we don’t control are going to play a very big role in deciding whether it’s possible or not,” Powell said on Wednesday. “It’s not going to be easy.”

Economists have grown increasingly pessimistic about the Fed’s ability to pull off the so-called “soft landing.”

In a note to clients today, Wells Fargo economists wrote: “Indications that inflation is taking root in the U.S. economy have caused the Federal Reserve to become even more hawkish. We now judge the recession in next year is more likely than not.”

And a survey of economists published this week by the Financial Times and the University of Chicago found that most expect a recession to start next year.

That means the United States could see widespread layoffs — even though inflation is still high and Americans pay higher prices for things like food and gasoline. “We’re not looking to have higher unemployment, but I would definitely consider that a positive outcome,” Powell said today.

Winners, hopefully: all of us, in the long run

The Fed’s goal with interest rate hikes, now and in the future, is to bring the inflation rate down to 2%, while keeping unemployment around 4%. If they succeed, it means they have succeeded in their soft landing objective. (Or a “soft landing,” as Powell put it in May.)

“I think it’s possible,” Powell said Wednesday, pointing to the current strength of the economy and the labor market.

While economists are starting to get pessimistic about the chances of avoiding a recession, it’s still possible. Americans just have to be patient while things unfold, they say.

“Monetary policy takes a long time to act. There’s a long lag between when the Fed moves this week, when it moved before, and when it trickles down to the economy,” Klein of the Brookings Institution said. “It can take up to a year before the full effect of a Federal Reserve interest rate hike is felt in the real economy.”

But if the Fed holds the landing, inflation could return to normal – alongside a healthy labor market with wages and consumer demand in balance.

Additional reporting by NPR’s Chris Arnold and NPR’s David Gura.

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