Interest Rate Hikes Could Pack US A One-Two Punch

In News
Interest Rate

Higher interest rates would make payments on credit cards, car loans, and mortgages even more expensive. This will strike consumers where it hurts, in the most impactful aspects of their family budgets, just as the public decide who to vote for in close races and head to the polls in November.

In summary

• This is the third rate increase of this scale in a row as the Fed focuses on bringing inflation under control.

• The Federal Reserve’s interest rate target is between 3% and 3.25 percent, the highest level since the 2008 financial crisis.

• The White House has made a big deal out of any drop in gas prices, which has understated the high prices of other goods.

Interest Rate
Housing Market Continues To Slow Down, As Federal Reserve Raises Interest Rates [Allison DinnerGetty Images]

Fed Makes Interest Rate Big Ahead Of Mid-term Polls

Inflation will hit voters and consumers twice in the run-up to the midterm elections.

The first is inflation, as evidenced by a slower rise in consumer prices than economists predicted. The second blow is that interest rates will still keep inflation under control, hurting people’s wallets.

This lousy combination may keep the least impressive economic news on the front page, making people wonder if President Joe Biden and his team were too quick to declare victory over inflation.

The Federal Reserve raised the target interest rate by three-quarters of a percentage point following a two-day meeting of the Federal Open Market Committee in Washington (or 75 basis points). This is the third rate hike of this scale in a row, demonstrating that the Fed is committed to taming inflation at any cost.

“We have the tools and the will to restore price stability for the benefit of American families and businesses,” said Federal Reserve Chairman Jerome Powell. “Over the next few months, we will look for strong evidence that inflation is going, which would be consistent with inflation going to 2%. We believe it is appropriate to continue raising the federal funds rate target range.”

In August, the consumer price index showed that inflation was rising at an annual rate of 8.3%, much higher than most economists had predicted. This meant that rates had to rise again before the elections.

Highest Interest Rate Since the 2008 Financial Crisis

The Fed’s interest rate is now 3% to 3.25%, the highest since the 2008 financial crisis. This is up 2.25 percent in the last four months, as part of the most aggressive rate hikes in the United States since the last big wave of inflation was brought under control in the 1980s, putting an end to stagflation as a political issue for a generation.

High-interest rates, widespread inflation, and slow economic growth marked the end of a period in which Democrats dominated national politics. Even when the Democrats reclaimed the White House a decade later, in 1992, they did not keep their promises of big-scale spending like the Great Society. Instead, they emphasized low inflation and promised to boost economic growth by lowering interest rates.

All of this has to worry Biden, who has presided over two quarters of negative economic growth and a 41-year high in inflation. He has spoken frequently about reducing the deficit, but he has also stated that he wants the federal government to spend significantly more on domestic programs.

Interest Rate
Federal Reserve Chairman Jerome Powell Addresses The Media [Mark WilsonGetty Images]

Some argue that the economy is not technically in a recession because the job market has remained strong. But there is no guarantee that this will continue. Even President Ronald Reagan had to deal with the economy going into recession and unemployment rising to 10.8% before the 1982 midterm elections. This was the price the Fed had to pay to beat inflation finally.

Biden may be able to avoid this, but more rate hikes raise the risk of a recession. And, if Democrats avoid the ax this year, the economy could slow even more by 2024.

A “Mission Accomplished” moment on inflation is a more immediate risk for Biden. He has talked about how little inflation increases each month. For example, he told 60 Minutes that inflation increased by “an inch” in the month that prompted the Fed’s most recent actions and that inflation was “zero” the month before.

Every time gas prices fell, the White House made a big deal. This was due to the energy sector dampening their hopes for lower inflation. However, this does not demonstrate other necessities, such as groceries, are expensive.

On the same day that the 8.3% inflation rate was announced, Biden and congressional Democrats hosted a party at the White House to commemorate the passage of the Inflation Reduction Act.

Stock markets closed at their lowest point in nearly two years as the president, Senate Majority Leader Chuck Schumer (D-NY), and House Speaker Nancy Pelosi (D-CA) praised their legislative work, which many economists do not believe will live up to its promises of lowering inflation, particularly in the short term.

Inflation has been one of the public’s top concerns this year, mainly to the detriment of Democrats. However, interest rates may now follow suit, making it difficult for Biden and his party to change the subject.

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