Will Fed Policy Changes Work to Tame Inflation?
This Week’s Increase
The Federal Open Market Committee’s two-day meetings start today, where the central bank is expected to enact the first in a potential series of interest-rate hikes. The goal behind the anticipated 25-basis-point increase is to control inflation, which is at its highest level in 40 years. CPI reached an astronomical 7.9% in February, well above the Fed’s 2% target for inflation.
After years of below-average inflation, the pandemic shifted the economic landscape. Supply-chain issues made goods more expensive, not only because of reduced availability, but also due to skyrocketing shipping costs and worker demands for higher wages. The Russia-Ukraine war’s impact on commodity prices, like oil, only made things worse by triggering spikes in fuel prices.
The Why Behind Rate Hikes
The ability to raise interest rates is one of the Federal Reserve’s primary tools to either cool off or stimulate the economy. When the cost to borrow is high, businesses and consumers will typically think twice before making investments and buying things. With lower demand, there is less pressure on prices, which the Fed hopes will gradually come down.
The Fed will likely implement a series of rate hikes, followed by observation periods. Because higher interest rates slow the economy, the Fed wants to avoid overshooting its target, given the risk of triggering unemployment or causing a recession.
Impact on Consumer Spending Power
Many have already felt the sting of higher gas prices and paying more for groceries. While Fed policy may effectively pump the brakes on inflation, some things are outside of its control. The impact of the Russia-Ukraine war and continued supply-chain disruptions will likely make inflation a stubborn adversary.
While consumers can expect to pay higher rates for credit cards, mortgages, and car loans they should also see rates on savings accounts get a bump. And, in time, if the Fed’s continued prodding takes its desired effect, prices may moderate and even come down.
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