Americans have closely monitored every monetary decision the Federal Reserve Bank has made in the past year. As inflation soared in the wake of the COVID-19 pandemic, the central bank for the United States initiated an aggressive interest rate hiking policy to cool down the economy, with eight consecutive increases ranging from 0.25 bps to 0.75 bps.
During his latest meeting with the Senate Banking Policy Committee, Jerome Powell, the Federal Reserve Chair, indicated that more interest rate increases were likely in upcoming months. “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Mr. Powell said. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” Despite decelerating in recent months after a peak in June, inflation remains stubbornly higher than the Fed’s targeted 2% rate, carried by a strong job market and ongoing supply chain disruptions.
The Federal Reserve Bank’s decision concerns the discount rate–the interest rate at which banks can borrow directly from the central bank–as well as the Federal Funds rate, which targets interest rates at which banks lend to each other overnight to maintain reserve requirements instituted by the Fed. Although these elements do not directly affect American consumers, they have a trickling effect on the economy.
Cascading Effect on Consumers
Lending institutions set the rates they charge their customers themselves, which is why borrowers are encouraged to shop around when they decide to make a big purchase, such as a car, a house, or open a new credit card. However, when the Fed increases the cost of borrowing money for the banks themselves, lenders are likely to pass these costs on to their clients. On the other hand, they may slightly increase their yield on deposits and saving accounts to encourage savers.
The Federal Bank’s decision to increase interest rates also negatively impacts the stock market and, consequently, Americans’ investment portfolios and retirement accounts. When borrowing costs increase, so does the cost of doing business for both public and private companies, stalling growth opportunities. Therefore, traders are often quick to sell stocks to move into more defensive investments, sending markets into a downward spiral. Existing bonds may also decline as investors foresee the entrance into the market of new bonds with higher interest rate yields.
According to the Federal Reserve Bank, these steps and their resulting negative impact are necessary to slow demand and eventually curb inflation.
We’ll keep you updated on further developments. In the meantime, if you’d like more information about buying/selling or refinancing in today’s market, give us a call or drop us an email.
