Americans with debt should expect to pay higher prices following the Fed’s latest interest rate hike.
The U.S. Central Bank raised its benchmark rate on Wednesday to a range of 5.00-5.25%, ostensibly pushing rates on credit cards, mortgages, and auto loans even higher as the Federal Reserve works to bring inflation down to its 2% goal.
While inflation has fallen in recent months, the headline reading of 5% is still too high, according to Alexander William Salter, an associate professor of economics at Rawls College of Business at Texas Tech University.
“The Fed will likely have to err on the side of tightness to get back to its 2% target,” Salter told The Dallas Express. “Central bankers should focus on stopping future dollar depreciation, which is one of the few things over which they have significant control.”
Even with a strict focus on achieving disinflation, the Fed’s policy actions over the past few years have done much to sour confidence in its ability to manage the economy.
The decision to raise the federal funds rate by a quarter percentage point in May marked the Fed’s 10th rate increase since March 2022 and the fastest rate cycle in more than 40 years.
Considering the full impact of the Fed’s latest 0.25% rate hike has yet to filter its way through the U.S. economy, consumers carrying a lot of credit card debt and those who have taken out loans on big-ticket items like real estate, vehicles, or large appliances should expect higher monthly payments, according to Greg McBride, the chief financial analyst at Bankrate.
To deal with tightening macroeconomic conditions, “consumers should focus on building up emergency savings and paying down debt,” said McBride, according to Fox 4 News. “Even if this proves to be the final Fed rate hike, interest rates are still high and will remain that way.”
Paying down debt might be more challenging than it sounds, though. Amid stubbornly high inflation, consumers have had to rely on various loans to stay afloat. In the fourth quarter of 2022, total credit card debt reached a record $930.6 billion, an annual increase of 18.5%, according to the latest TransUnion Credit Industry Insights Report (CIIR).
“Whether it’s shopping for a new car or buying eggs in the grocery store, consumers continue to be impacted in ways big and small by both high inflation and the interest rate hikes implemented by the Federal Reserve,” said Michele Raneri, vice president of U.S. research and consulting at TransUnion, in a press release about the latest CIIR.
Until rates come down, consumers are expected to continue pursuing “credit products such as credit cards, HELOCs and unsecured personal loans to help make ends meet and put themselves in stronger financial standing moving forward,” Raneri said.
When asked recently about the possibility of near-term rate cuts, Federal Reserve Chairman Jerome Powell responded by shooting down the notion that the U.S. was nearing the point of rate cuts.
“We on the committee have a view that inflation is going to come down not so quickly and that it will take some time — and in that world, if that forecast is broadly right, it would not be appropriate to cut rates. And we won’t,” Powell told reporters following the Federal Open Market Committee meeting in May.
Salter said he does not see a near-term future involving rate cuts but does see a pause as the most likely scenario.
“The new target fed funds rate is 5.25%. Inflation is roughly 4%, which means the real [inflation-adjusted] fed funds rate is about 1.25%,” he told The Dallas Express.
“For comparison, most economists think the neutral fed funds rate — not too tight, not too loose — is between 0.25% and 0.5%. That means the Fed is now on the tighter side, which is where it should be to get inflation under control. But there’s likely no need to go tighter,” Salter claimed.