Federal Chair Jerome Powell has warned the American economy will see even more damage before inflation comes down from a 41-year-high of 8 per cent – which Republicans have blamed on Biden’s spending.
The Federal Reserve on Wednesday raised interest rates by 0.75 per cent – their biggest increase since 1994 – in an attempt to rein in inflation. Powell had warned last month that more hikes are likely in the near future.
‘It’s not going to be easy. And it may well depend, of course, on events that are not under our control. But our job is to use our tools to try to achieve that outcome, and that’s what we’re going to do,’ Powell said on May 5.
Speaking at a press conference after the central bank’s two-day policy meeting that ended Wednesday, Powell reinstated that bringing down the inflation, which currently sits at 8.6 percent, was a high priority.
But Americans must now brace for a double-whammy of higher repayments and ongoing rises in the cost of living as the Fed’s planned remedy for inflation begins to kick in.
‘We’re strongly committed to bringing inflation back down. And we’re moving expeditiously to do so,’ Powell said.
‘Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data,’ he said.
‘We think that the public generally sees us as as very likely to be successful in getting inflation down to 2 percent. and that’s critical,’ he noted. ‘It will take some time to get inflation back down but we will do that.’
The high inflation rate has resulted in increased prices of food, gas and housing – areas that affect most Americans. Republicans have hammered Democrats politically on the high prices of good and services for Americans and many Democrats are worried they will take a battering at the polls in this November’s midterm election.
The GOP has largely blamed Biden’s spending policies, including his $1.9 trillion American Rescue Plan and the $1.2 trillion Infrastructure Investment and Jobs Act, for the stark inflation rise.
Biden disregarded criticism on Tuesday before the Federation of Labor and Congress of Industrial Organization convention in Philadelphia. He cited job growth, low unemployment and a strong labor market.
‘I don’t want to hear any more of these lies about reckless spending,’ he said. ‘We’re changing people’s lives.’
The Federal Reserve on Wednesday raised interest rates by .75 percent in their biggest increase since 1994 in an attempt to rein in 41-year high levels of inflation – and warned more hikes are likely in the near future. ‘We’re strongly committed to bringing inflation back down. And we’re moving expeditiously to do so,’ Chairman Jerome Powell said at a press conference after the central bank’s two-day policy meeting that ended Wednesday
Biden disregarded criticism about his spending on Tuesday before the Federation of Labor and Congress of Industrial Organization convention in Philadelphia. ‘I don’t want to hear any more of these lies about reckless spending,’ he said. ‘We’re changing people’s lives’
The move will increase its benchmark short-term rate, which affects many consumer and business loans, to between 1.5 percent and 1.75 percent. The result will drive up loan rates for homes, cars, credit cards and other items – making it much more expensive to borrow money
The measure by the central bank to raise interest rates by .75 will increase its benchmark short-term rate, which affects many consumer and business loans, to between 1.5 percent and 1.75 percent. The result will drive up loan rates for homes, cars, credit cards and other items – making it much more expensive to borrow money.
He said the central bank wants to see inflation get down to 2 percent from a record 8 percent, with rising prices among the top concerns for American voters heading into midterms that are predicted to end in heavy losses for the Democrats.
Powell had suggested last week that a higher than expected hike in interest rates was coming. The stock market rallied after the official announcement – the S&P 500 was 1.9 percent higher, thee Dow Jones gained 397 points and the Nasdaq composite was 2.7 percent higher.
‘It is essential that we bring inflation down if we were to have a sustained period of strong labor market conditions,’ he said.
He warned more hikes could be coming and that inflation could get worse before it gets better.
And more interest rate increases could follow. Powell said that he ‘anticipates that ongoing increases in that rate will be appropriate.’
He said that would not likely be as high as Wednesday’s .75 per cent increase. He predicted the next increase would be .50 per cent.
Powell had suggested last week that a higher than expected hike in interest rates was coming. The stock market rallied after the official announcement – the S&P 500 was 1.9 percent higher, thee Dow Jones gained 397 points and the Nasdaq composite was 2.7 percent higher
Affects of latest interest rate hike
WILL THIS MAKE IT MORE EXPENSIVE TO BUY A HOME?
One of the sectors the Fed has been watching closely is the interest-rate sensitive housing market, where prices have risen 38 percent since the start of the pandemic.
The surge has been driven by low borrowing costs, put in place by the Fed to cushion the economy from the COVID-19 pandemic, meeting an upswell in demand and a shortage of properties for sale.
Mortgage rates have already risen sharply since the Fed began signaling late last year it would likely tighten policy, with the average contract rate on a 30-year fixed-rate mortgage reaching 5.65 percent last week, the highest level since late 2008, the Mortgage Bankers Association reported earlier on Wednesday.
‘Mortgage rates are definitely going to go up over the next few weeks,’ said Matthew Pointon, senior property economist at Capital Economics, with daily mortgage data showing the average 30-year fixed rate now around 6.28 percent and possibly going above 6.5 percent over the next few weeks.
Worse is set to come, Pointon says, with mortgage rates probably not peaking until the middle of next year.
If mortgages hit 7 percent it means that for the average person trying to purchase a $400,000 home with a down payment of $10,000, they would be stuck with a $2,913 mortgage payment after the rate hike, a significant jump from the $2,730 before the increase.
WILL MY CREDIT CARD COSTS GO UP?
If you’ve got outstanding loans without fixed interest rates, the answer is a simple, yes. Though the Fed doesn’t control what banks or car dealers charge for such loans, credit card rates and auto loans typically rise when the Fed’s policy rate does.
Household debt has been rising rapidly, with consumer credit up more than 8 percent in the first quarter to $1.5 trillion, a recent Fed survey showed.
The hike will also play a major role in people’s ability to pay off debt, as the average interest rate on credit cards jumped to more than 19 percent.
The average American has about $6,000 in credit card debt, according to Experian Consumer Credit, with the new interest rates, consumers would have to pay $349 a month to pay off the debt in 24 months, a slight increase from $346 before the hike.
WHAT ABOUT MY AUTO LOANS AND STUDENT AND PERSONAL LOANS?
The interest needed to pay back on auto loans will see a modest increase.
As the average new car costs about $25,000, a new rate increase to 11.05 percent means that in the five years to pay off the car, consumers will have paid an additional $6,120.84 for the interest. It’s a notable rise from the $5,673.95 from the previous rate.
Although the interest will go up, auto dealers tend to be more sensitive to the competition, and through five-year financing, the monthly payment interest will likely go up by on $7 for most Americans.
Student loan payments will also see a boost as prior to the interest rate hike, an average loan of $28,400 would become $37,494 in ten years.
With the new interest rate at 6.55 percent, a graduate would have to pay a total of $38,784 in 10 years.
Even personal loan repayments will see a similar increase. A personal loan has an average 20.06 percent interest rate, according to Nerd Wallet, so to pay off a $10,000 loan in five years, consumers would have to spend $15,916.37.
After the hike, a borrower would need $16,167.95 to pay off that loan in five years.
HOW WILL MY SAVINGS ACCOUNT BE AFFECTED?
Savings, certificates of deposit and money market accounts don’t typically track the Fed’s changes.
Instead, banks tend to capitalize on a higher-rate environment to try to thicken their profits. They do so by imposing higher rates on borrowers, without necessarily offering any juicer rates to savers.
But while interest on loans continue soaring, savings accounts are expected to rise from an average 0.07 percent to 0.08 percent.
This means that a $5,000 savings account, with a monthly deposit of $200, will yield $7,404.88 within a year.
WILL THIS BRING DOWN THE COST OF LIVING?
In short, no. That’s one of the difficulties the Fed is facing. By raising rates it can cool demand in the economy by making borrowing costs more expensive, nudging consumers and businesses to curb spending, but it can’t do anything about supply shocks.
‘Clearly today’s 75 basis point increase is an unusually large one and I do not expect moves of this size to be common. From the perspective of today, either a 50 basis point or a 75 basis point increase seems most likely at our next meeting. We will, however, make our decisions meeting by meeting,’ he noted.
The Fed’s policy-setting Federal Open Market Committee said it remains ‘strongly committed to returning inflation to its 2 percent objective’ and expects to continue to raise the key rate.
Committee members now see the federal funds rate ending the year at 3.4 percent, up from the 1.9 percent projection in March.
The hikes also show how the central bank is struggling to combat inflation. Until this week, economists had expected the Fed to raise its benchmark interest rate by only half a point.
But to show its seriousness in combating inflation – even at the price of the economy – officials also predicted that the unemployment rate will increase to 3.7 per cent this year and to 4.1 per cent by 2024.
‘We don’t seek to put people out of work,’ Powell said. ‘Of course, we never think too many people are working and fewer people need to have jobs, but we also think that, you really cannot have the kind of labor market we want without price stability. And we have to we have to go back and establish price stability.’
White House press secretary Karine Jean-Pierre was asked on Wednesday if the administration believes higher employment is an acceptable trade off for lower inflation.
She didn’t directly answer, simply saying ‘we brought unemployment rate down below 4.4 percent.’
She also noted the Federal Reserve would ‘deal with inflation under their purview. They have the best monetary policies to do that. And so we want to give that independence there.’
The central bank operates independently of the White House. The president appoints the board members, who serve fixed-year terms.
At his press conference, Powell blamed Russian President Vladimir Putin’s invasion of Ukraine for the increased prices of food and gas – an argument made by President Joe Biden and his administration. And Powell said the covid pandemic in China will still causing supply chain issues.
‘The surge in prices of crude oil and other commodities that resulted from Russia’s invasion of Ukraine is boosting prices for gasoline and food and is creating additional upward pressure on inflation,’ he said. ‘And covid-related lockdowns in China are likely to exacerbate supply chain disruptions.’
He also sounded a positive note, saying inflation in the United States was not as a bad as in other parts of the world.
‘If you look around the world at where inflation levels are, it’s absolutely extraordinary. It’s not just here. In fact, we’re sort of in the middle of the pack. Although I think we have a different kind of inflation then other people have and partly because our economy is stronger and more highly recovered,’ he said.
The high costs of goods and services have sparked fears the country may be headed into a post-pandemic recession. When covid struck, the Fed took several immediate measures to ease economic burdens, including slashing interest rates.
Now, inflation and the economy have spiked to the top of voters’ concerns headed into the November election that will decide what party controls Congress.
The interest rate hikes already have led to increased borrowing costs with the average 30-year fixed mortgage rate topping 6 percent.
Powell warned housing prices could go up in the short term.
‘Prices may keep going up for a while even in a world where rates are up. So it’s a complicated situation. We watch it very carefully,’ he said.
He suggested waiting to buy a new home.
‘If you’re a homebuyer, somebody or 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 back together and we’re inflation is down low again, and mortgages or mortgage rates are low again,’ he noted.
The Fed raised rates by a half-percentage point last month, the first such increase since 2000, to a range between 0.75 percent and 1 percent.
Ahead of Wednesday’s announcement, U.S. stocks and bonds were up on the presumption the fed would raise the interest rate.
It was a promising sign after the S&P 500 closed in a bear market on Monday, down 3.9 percent. The S&P closed down more than 20 percent from its January high – for the first time since 2020. The Dow Jones Industrial Average fell 2.8 percent, or about 875 points, while the tech-heavy Nasdaq Composite declined 4.7 percent.
White House press secretary Karine Jean-Pierre said on Monday that the White House was watching the stock market closely.
‘We’re watching closely. We know families are concerned about inflation in the stock market. That is something that the president is really aware of,’ she said.
Biden’s average approval rating on gas prices is about 30%. On inflation, it’s also about 30 percent.
‘We know that higher prices are having a real effect on people’s lives,’ Jean-Pierre said. ‘We get that and we are incredibly focused on doing everything that we can to make sure that the economy is working.’
‘We are coming out of the strongest job market in American history. And that matters and that a lot of that is thanks to the American rescue plan, which only Democrats voted for that Republicans did not. And it led to this, this economic growth, this historic economic boom that we’re seeing.’
She denied the boom also led to the historic records of inflation.
The White House has been defensive of President Joe Biden’s economic record as voters give him low marks for his handling of inflation.
Biden on Tuesday slammed Donald Trump for his job losses as he defended his own stewardship of the economy during record high inflation, a bear market and fears of a recession.
‘Do you remember when our economy was like – what it looked like before we took office: 3,000 Americans are dying every day from COVID; 20 million Americans had lost their jobs on the last guy,’ Biden said during a speech in Philadelphia before the AFL-CIO.
‘In fact, so many Americans lost their jobs, that my predecessor became just a second president in history to leave office was fewer jobs in America, and when he took office,’ he added.
Trump left office as the covid pandemic caused a nationwide shutdown. Biden is dealing with a post-pandemic opening of high inflation, a declining stock market and fears of a recession.
Besides attacking his predecessor – he did not mention Trump by name in his speech – Biden argued he was doing all he could to bring down the prices of gas and food.
And he framed the economic debate as a political choice ahead of the November midterm election.
‘America still has a choice to make. A choice between a government by the few, for the few. Or a government for all of us – democracy for all of us, an economy where all of us have a fair shot,’ he said.
He once again blamed Russian President Vladimir Putin’s invasion of the Ukraine for the spike in prices.
‘I’m doing everything in my power to blunt Putin’s gas price hike. Just since he invaded Ukraine has gone up $1.74 gallon – because of nothing else but that,’ he said.
‘So I have a plan to bring down the cost of gas and food. It’s gonna take time.’
President Joe Biden defended his own stewardship of the economy in a speech on Tuesday
Prices of everything from gas to travel to hotels have gone up by double digits since January 2021
The Labor Department’s report on Friday showed that the consumer price index jumped 1 percent in May from the prior month, for a 12-month increase of 8.6 percent.
The annual increase, driven by soaring food and energy prices, was hotter than economists had expected, and topped the recent peak of 8.5 percent set in March, reaching a level not seen since December 1981.
Meanwhile, on Saturday, for the first time ever, a gallon of regular gas costs $5 on average nationwide, according to AAA.
It was the 15th straight day that the AAA reading has hit a record price, and the 32nd time in the last 33 days.
As of Wednesday morning the average price sits at $5.01, after hitting a new high of $5.02 on Tuesday.
Gas is most expensive in California, where some areas are nearing $7.00 per gallon, while they remain the lowest in Georgia at $4.50 for a regular gallon of gas.