WASHINGTON, D.C. (WGHP) – With inflation in record-high gear, everyone looks to elected leaders to help curtail rising costs that are denting personal spending and wealth, which can be scary for each of us.
As we have seen in past months, the post-COVID-19 increase in prices, the supply chains that were curtailed because of that pandemic and, to some analysts’ thinking, stockpiles of personal cash that wasn’t spent during the pandemic all have fed this crisis.
In this case inflation in May rose 8.6%, the fastest rate since 1981. Fuel oil is up 106.% during the past year, and shelter costs – think housing – rose at the fastest pace in the past 31 years.
There is always political finger-pointing and outcries at President Joe Biden and every other elected leader, but when you look at the picture logically, about the only thing the government can do to curtail the price-raising by businesses is to limit their borrowing power by raising interest rates.
And the Federal Reserve has done that this week, raising the rate by .75 percentage points, the most significant increase since 1994.
Increases in interest rates are designed to reduce borrowing and the amount of cash in the marketplace, thus reducing spending and the supply-demand issues that can cause prices to rise. It makes debt more expensive.
And, although this percentage-point tug-of-war has gone on for generations, new discussions and decisions always prompt new questions. Here are five you may have.
1. Isn’t the economy really doing well?
Unemployment is at record lows. Wages have increased for workers. Companies are expanding. And the housing market? Well, home values in Greensboro have risen by nearly 20% in the past year and more than 63% for the past five years. How in the world can the economic news be so dire? A lot of it is based on a fear that costs will rise so high that wages won’t keep up and that companies will cut back on employees because their expenses are too high. This could trigger a recession. The investment market, which is how we gamble our money on the future of businesses, has lost significantly. The S&P Index – a broader indicator of investments than the stock exchanges – is about 16% from its record high. Cryptocurrency also has lost, if you can understand that. All of this makes everyone fret.
2. Will my mortgage rate go up because of this Fed increase?
Unless you have an adjustable-rate mortgage or some sort of balloon arrangement, then the simple answer is no. That’s why most people acquire fixed-rate mortgages that endure for 15 or 30 years. Those rates are set, and if you borrowed for your home for 30 years at, say, 5.9%, then that’s what your rate will be. Unless you are in the business or recently purchased property you may not know that mortgage rates have been on the increase already. They in fact have been the highest they have been in about 10 years.
3. What happened after that big Fed bump in 1994?
After the Fed made its last large borrowing-rate increase in 1994, the interest rate in 1995 on a 30-year, fixed-rate mortgage was 9.13%, which was less than half what it had been in 1981. By 2000 it was down to 8.25%. In 2015 it was 3.66%. The economy became very prosperous by the end of the century, but then that led to the technology bubble and the questionable lending practices that triggered the recession of 2008. You can see the ups and downs in that illustration.
4. What about my other loans or debt?
If you have an auto loan, that would not change because of this rate increase. Those rates are largely fixed. But if you are looking to buy or to lease, the rates will be higher. If you use a home equity line of credit to make a large purchase – which some people do because that interest is tax-deductible – then the rates could be affected. A more direct impact might be on your credit card debt. If you are carrying a balance and paying interest, your rate now probably is about 16%. But credit card companies can change those at any time. And CNBC says some analysts think that the rate could be as high as 19% this year, which would be a record.
5. Bottom line: Will all of this work?
With the goal of making borrowing more expensive for consumers and businesses – and limiting their buying – there could be one upside for all of us: the supply-chain issues could ease, CNBC says. Analysts say supply-chain issues drive wage increases, which drive inflation. The fear is that all of this happens too fast and stalls the economy overall. One analyst, Tara Sinclair of Indeed Hiring Lab, told CNBC that treating inflation in the economy is like treating cancer with chemotherapy. “You have to kill parts of the economy to slow things down,” she said. “It’s not a pleasant treatment.”