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These Items Grow More Expensive When Fed Lifts Rates Sharply

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These Items Grow More Expensive When Fed Lifts Rates Sharply

Anyone who has worked with a personal trainer knows the term “short-term pain for long-term gain.”

The same is true in economic circles this week, as the Federal Reserve is set to raise the benchmark federal funds rate by 0.75 percentage points.

Such a move would raise the benchmark rate to its target range of 2.25% to 2.5% as the Fed battles rising U.S. inflation (9.1% by June 2022) and a deteriorating economy.

Currently, U.S. GDP is down 1.6% in the first quarter of 2022, and the Atlanta Fed now estimates GDP at -1.6% in the second quarter.

The idea is to keep raising interest rates to keep inflation in check. That has been the Fed’s favored policy stance for decades. When the Fed raises interest rates, currency prices rise, cooling the economy but potentially hitting already struggling American households.

“The Fed has to be aggressive about raising rates because they know they are way behind the inflation curve,” said Tom Graff, investment director at Facet Wealth. “They also know that if they don’t bring down inflation sooner, their reputation for maintaining price stability could be permanently damaged.”

Economic policy overkill?

When so many Americans are hurting right now, is the Fed taking a huge risk of raising rates significantly?

This emotion is on the table.

“While finally showing signs of slowing as gas and oil prices fall, high inflation remains a serious concern,” said Jacob Channel, senior economist at Lending Tree in Charlotte.

“As a result, the Fed is poised to raise its target [federal funds] Raise rates by 75 basis points at the upcoming meeting.Having said that, a 100 basis point hike [1 percentage point] Not entirely impossible. “

What’s more, the problem with inflation is that people spend more on the same amount of goods and services, but they pay more out of their own pockets, especially the country’s most vulnerable citizens.

Dan North, senior economist at trade credit insurer Allianz Trade, told TheStreet: “Inflation hits the lowest income households harder because items like petrol and food make up a much larger portion of their budgets and are free to There is less spending at the disposal.”

For example, people used to have the money to go out to eat, even fast food, or go to the movies once a month, and now many Americans simply don’t do those things.

“So it’s the worst regressive tax to hit low-income households,” North said.

Something that gets more expensive with rate hikes

With price increases typically tracking Fed rate hikes, U.S. consumers can expect heartbreaking price increases in these major consumer categories.

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Mortgage rates. Mortgage rates are likely to trend higher in the coming weeks after the Federal Reserve could raise rates again sharply. “Of course, there’s no guarantee that mortgage rates — the current average rate on a 30-year fixed-rate mortgage is 5.54% — will revolutionize all of this,” Channel told TheStreet.

Interest rates today are at more than 10-year highs.

“You’d have to go back to June 2009 to see the average 30-year fixed mortgage rate at or above 5.5%,” Channel noted.

“Today’s high rates have dampened borrower demand for mortgage purchases and refinancing. In fact, mortgage demand just hit a 22-year low.”

bond investment. Investors holding bonds are effectively borrowing money from the issuer of the bond, and the issuer repays it again in a fixed amount that becomes worthless with inflation.

“Because many retirees hold bonds, inflation affects their ability to save and spend as they get fixed payments again and prices soar,” North said.

credit card rates. Consumers should pay particular attention to the APR on credit cards.

Matt Schultz, chief credit card analyst at Lending Tree, said: “Fed rate hikes are really good for credit card holders, and all signs point to the Fed not stopping anytime soon.”

“This means that even if your credit card APR is as high as ever, your credit card debt will only get more expensive in the coming months.”

Home Furnishings. Higher inflation can also lead to higher prices for retailers.

“Inflation is creeping up at the Fed, and now our economy is out of balance,” said Preston Forman, a certified financial planner at Seasons of Advice Wealth Management in New York.

“War in Europe, massive job vacancies and supply chains still disrupted by the pandemic are just the most obvious problems.”

Forman noted that he is still waiting for the bed frame and desk to be ordered for his daughter in September 2021. “We want it to arrive before she goes to college,” he said.

Then where to go?

The Fed is in a long game with inflation, interest rates and the U.S. economy.

“Ultimately, the Fed wants a more normal inflation and interest rate environment,” Forman said. “When inflation is in the 3% to 4% range — roughly historical levels — the Fed may stop.

“With the Fed raising rates to 75 basis points, and with the help of lower oil prices, we may be on target by the end of the year,” Foreman added.

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