The Inflation Cure
If you think runaway inflation is brutal, wait until you get hit by the cure.
Last week, the Federal Reserve raised the interest rate on money it lends to other banks by .75%, the biggest hike in three decades. Fed Chair Jerome Powell said the hike is necessary to rein in skyrocketing inflation. He's planning more hikes in the coming months. These hikes will lead to increased interest charges on credit cards and higher rates on home equity loans, car loans and mortgages. It's a punch in the gut for people who need to borrow.
Get ready for the interest rates on your credit card to top a budget-busting 20% two monthly statements from now -- up from a current average of 14.6%.
If you're shopping for a home or a car, adjust your expectations downward. You will now be able to afford less than you thought because monthly payments will include significantly higher interest costs.
The Fed has no choice but to act. In fact, it waited too long. The Fed's mission is to maintain price stability and full employment. Inflation hit a 40-year high in May.
Inflation is partly global, but it's significantly worse in the U.S. than in other developed countries, according to a report from the San Francisco Federal Reserve. Excessive government spending has made the nation awash in cash.
During the pandemic, consumers had money deposited in their bank accounts by Uncle Sam. When COVID lockdowns ended, they went out to spend it. That pushed prices upward. Those giveaways are now causing inflationary pain.
Had the Fed acted sooner, contends former Obama administration economist Steve Rattner, the rate hikes would not have to be so drastic, and the cure so painful. The Fed "was inexplicably slow," he says.
Harvard economist and former Treasury official Karen Dynan predicts "generalized pain" in the coming months.
"The transition is going to be very difficult," cautions Seth Carpenter, global chief economist at Morgan Stanley, who adds that it takes a long time for inflation to come down.