On Wednesday, the Federal Reserve voted to raise interest rates by a quarter of percentage point in what many experts say is an attempt to fight the impacts of inflation. Americans are currently dealing with the worst inflation in 40 years, and the Biden administration is desperate to rein in the cost of consumer goods and the dwindling value of the dollar.
On Monday, The Daily Wire’s Cabot Phillips joined the “Morning Wire” podcast to explain why the Fed enacted such a policy and how it will impact the average American family. In short, the move could have a ripple effect that will touch everything from your home to your car payments.
“Essentially the Federal Reserve interest rate establishes the target cost of borrowing money,” Phillips explained. “So whether you want a loan for a car, house, or land, banks determine their interest base rate in large part on the rates set by the Fed.”
“Now, since March 2020, the Fed’s rate has been between 0 and 0.25%, meaning you could basically get money for free, because the government was worried about an economic slowdown during COVID, and wanted people to keep borrowing and spending money during the pandemic,” he continued. “The Fed committee that decides the interest rate meets every six weeks, and last Wednesday decided for the first time since 2018 to raise interest rates.”
These rates will periodically rise until they reach two percent by the end of year, he added. “After that, they’re expected to reach 2.75% by the end of 2023 — that would be the highest federal interest rate since 2008,” he noted.
John Bickley, co-host of “Morning Wire,” asked Phillips how this would, in theory, help solve inflation.
“The general idea is that as interest rates go up, average people are less likely to take out loans because the deals aren’t as good as they’ve been,” he explained. “As that happens, the idea is that people will stop borrowing and spending money, which will leave fewer active dollars in the economy … hopefully curbing inflation.”
But, as Phillips noted, the rate hike will also have a ripple effect throughout the economy.
“For anyone taking out larger loans, they are gonna notice this,” Phillips reported. “A two percent increase on a mortgage loan, for example, would mean that the half million dollar house you want to buy could be $10,000 more in the long run.”
“If you have an existing car loan or federal student loan, those won’t be affected, because they’re fixed rates, but others will,” he clarified.
For example, annual credit card rates are almost certainly going to go up this year, especially for people with lower credit scores, and banks will be more stingy this year on letting people open new lines of credit. If you’re looking to buy a home right now, mortgage rates are also going up in the short term, and if you have an existing mortgage that’s not a fixed rate but a variable rate, you can also expect to start paying more in interest each month.
Nonetheless, Phillips wanted to “be careful making declarations here, as trying to predict the future of economics is generally a crapshoot. But the expectation is that with less money changing hands, banks will do more to incentivize people to keep their money in savings because it’s going to make banks more hungry for money.”
“That means there’s a good chance CD rates will go up in the coming months,” Phillips stated. “There’s also a good chance your financial advisor is going to start encouraging you to pay off credit card debt and really look into the specifics on any new auto loans you’re taking out, because if those aren’t fixed, they’re gonna get more expensive.”
“Definitely a lot to keep in mind for consumers these days,” Bickley remarked in reaction to the news.
Monday’s episode of “Morning Wire,” and all episodes of “Morning Wire,” can be listened to here.
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Source: Dailywire
