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Why the latest rate hike should worry you

Why the latest rate hike should worry you

6 minutes of reading

On Wednesday it was confirmed a new Fed Funds rate hike of 0.75%.

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With this new measure, the Central Bank expects something else: lower prices.

In the meantime, everyone should expect a rocky road back to 2% inflation. That means an increase in the cost of taking on new debt, from mortgages to credit card interest to personal loans. Unemployment is also expected to rise as the central bank deliberately holds back economy.

Why the Central Bank continues to raise interest rates

The Federal Reserve has been raising interest rates since the start of the year in a sustained effort to combat inflation that rose by 8.3% in August according to reference point.


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The Fed Funds rate determines the interest that banks have to pay to borrow money from each other overnight. When that rate rises, banks pass on their extra costs to their customers, making the cost of borrowing higher for everyone from businesses to households.

The Fed does this for one simple reason: to get you to spend less money.

With August inflation above the 8% mark for the sixth consecutive month, the cost of consumer goods is rising at a rate well above the healthy sweet spot of 2% per year.

The central bank has been clear about its objective: by raising interest rates, it expects demand to fall across the board. With fewer customers buying their products and services, companies will be forced to lower prices to compete. This process should eventually cool inflation down to 2%.

How rising interest rates affect purchasing power

Although everyone would be happy with lower inflation, the path to that goal will be painful for many, especially those who plan to take on new debt in the near future.

As a general rule, rising interest rates do not affect debt purchased at fixed rates, such as fixed rate loans or mortgages. They will affect payments on variable interest loans, as well as interest on newly acquired debts.

mortgage

Fixed interest rates on housing loans were at decade-low levels in recent years and reached below 3% for several months in 2020 and 2021. But rising interest rates affect the cost of housing loans.

The data Central Bank of St. Louis put the median fixed rate mortgage at the time of writing at 6.29%.

With interest rates expected to continue rising well above the 4% mark in 2023, mortgages should follow suit.

Customers paying off adjustable-rate or hybrid adjustable-rate mortgages should also see their interest rates increase based on their mortgage structure.

Credit card

Data shows that Americans are using their credit cards more and inflation is affecting the lower income population having difficulties with payments. Rising interest rates are bad news for those who rely on credit cards to cover monthly expenses, as the federal funds rate affects the credit card’s annual percentage rate, or APR.

When your card’s “payment period” ends, if you haven’t paid the amount you owe, you’ll start owing more as interest accrues. A return is an annualized representation of the daily interest charged on balances accumulated after the end of the month plus fees.

Earlier this month, Bloomberg reported this average credit card interest rates were the highest in 25 years. By 18% and rising, this number has been growing since the Central Bank started raising interest rates and is expected to continue rising with further increases planned for November and next year.

Personal loans

Interest rates on personal loans (often taken out to pay off credit card debt or other types of debt) also rise with federal hikes, according to Bank interest.

These include mortgages, often called second mortgages, as well as car loans and other types of consumer debt.

Federal student loans are exempt. These will have fixed interest rate if they are taken before July 2023 due to the measures that have been taken since the outbreak began.

Interest rates and job security

The increased cost of raising new debt is not the only consequence of rising interest rates. Since the underlying goal is to slow the economy, the Fed’s actions can also affect the labor market.

“Job creation has been strong in recent months and the unemployment rate has remained low,” he said. the Press release from the Central Bank announcing a new increase on Wednesday.

The strength of the current labor market is one of the few factors preventing the National Economic Institute from declaring an official recession, even though the economy has been in recession for two consecutive quarters.

With 3.7% unemployment in August, the labor market is in a worse position than in July, but overall better compared to August 2021.

As interest rates rise and consumption slows, employers may respond by cutting costs, and that means laying off some of their workforce.

According to Trading Economicsthe unemployment rate is predicted to be around 4.4% by 2023, which will put increased pressure on workers and businesses.

Although the Fed’s ultimate goal is to maximize employment, the current high level of employment is inconsistent with a shrinking economy.

Unemployment is expected to rise temporarily until inflation subsides and the economy recovers.

Photo by Shutterstock.

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