The Federal Reserve now has one mission: bringing inflation down, come what may.
The Fed announced Wednesday that it’s raising interest rates by three-quarters of a point, marking its fifth interest rate hike of the year and the third-straight 0.75 percent rate increase. While the broad spectrum of interest rates — mortgage rates, car loans and so on — are relatively low in the broad sweep of history, the pace at which they’ve been rising has been rapid.
That acceleration has predictable first-order consequences — and more obscure second-order ones. Clearly, the change will affect people who plan to borrow money in the future or who have loans with adjustable interest rates. Those rates have and will continue to rise, meaning higher interest payments and perhaps smaller loans.
At the same time, the Federal Reserve projects inflation to only come down to its preferred near-2 percent level sometime in 2024 and likely two more rate hikes this year. This means that, according to the plans of the Fed, Americans are likely to continue to be hit with the pain of elevated inflation and rising rates for at least another year.
Some of the most dramatic effects of past and likely future interest rate hikes have been felt in the housing market. After breakneck rises in both home sales and home prices during the pandemic, the Fed has effectively put a damper on the market. Mortgage rates, while not exceedingly high in the broader context of history, have nonetheless been rising at the fastest clip in recent memory. Compounded with elevated home values, this means that even as prices have started to come down a little, homes have actually gotten less affordable, according to data from the National Association of Realtors (NAR).
In July, the most recent month NAR has made the calculations, the median price for an existing single-family home was $410,600, and the typical monthly principal and interest payment was $1,861, which was just under a fifth of the median family income. A year prior, when interest rates were about half of what they are today, the monthly payment in the index was $1,240, just over 17 percent of the median family income used by NAR.
It’s a double-whammy for the housing market: Those who want to sell are getting less than they would have earlier this year (and a new home would be more expensive), and those who want to buy are paying higher in mortgage and interest payments for less house, even if headline prices have decreased. So, sales have slowed down overall.
Homes are not the only purchases Americans largely buy on credit. Just about the entire consumer loan complex is tied, in some way, to the Fed’s actions.
Auto loan rates have risen recently. According to Bankrate, a five-year car loan rate has risen from just under 4 percent to just over 5 percent. Meanwhile, credit card rates are just over 18 percent, compared with 16 percent a year ago.
The stock market has felt the effects of higher rates as well. While a number of factors influence stock prices over time, lower rates tend to correspond with rising stock prices and higher rates with falling ones. This effect is only magnified with high interest rates stalling overall economic growth, further bringing down stock prices. While the market has not plunged down in a straight line as the economic has tightened up, it has fallen substantially in the last year. After a speech in August where Federal Reserve Chair Jerome Powell warned that higher rates would “bring some pain to households and businesses,” stocks promptly fell.
But the point of interest rate hikes isn’t just to monkey around with financial products, even if that’s one of the “channels” by which the Federal Reserve can heat up and cool down the economy. The Fed is trying to wrench down inflation from its near 40-year highs. Since the beginning of the Fed’s campaign of blistering interest hikes, Powell has made it clear that he doesn’t expect inflation to fall until wage growth slows down substantially.
Although Americans’ wages are being eaten away by high inflation, in what are known as “nominal” terms (i.e., the amount one sees on a paycheck), they’ve been rising at around 5 percent for most of the last year. And while the Fed has not said explicitly it’s trying to get unemployment to go up — it instead says that it wants the number of job postings per unemployed worker to go down — it projected Wednesday that unemployment will likely rise to 4.6 percent in 2023. In June, the last time the Fed released its economic projections, it anticipated 4.1 percent unemployment.
In March, after the first interest rate hike of the year, Powell said that wages are “moving up in ways that are not consistent with 2% inflation over time.” Wednesday’s hike shows that the Fed does not think that goal has been achieved. While it promises that, over time, mild wage growth and low inflation are better for workers than the alternative, it may take some “pain.”
Thanks to Lillian Barkley for copy editing this article.