What does the Federal Reserve’s interest rate hike mean for Utah consumers?

As the economic fallout from Russia’s invasion of Ukraine raises US inflation rates that were already at record highs before the attack began, the Federal Reserve is expected to raise interest rates this week for the first time in three years to curb skyrocketing consumer costs. .

The expected 0.25% hike will be the first in a series of Fed actions aimed at reining in US inflation, which has hit 40-year highs in each of the last three months of a year. on the other, including the 7.9% February rate reported by the US Department of Labor last week.

Inflation in February was even higher for consumers in the Mountain West states, which include Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah and Wyoming, where the 12-month price increase reached 9.7%, the national record.

With a war raging in Europe and price increases at their highest level in four decades, Fed Chairman Jerome Powell will seek to engineer a “soft landing” or gradual slowdown in economic activity that will help curb the rise in prices, while keeping the job market and the economy growing. .

Yet many economists worry that with oil and other commodity prices soaring, the added burden of higher interest rates could completely stifle growth.

“You have to be both lucky and good” to avoid causing a downturn, said Alan Blinder, a Princeton University economist who served as the Fed’s vice chairman from 1994 to 1996, when the central bank was in power. widely considered to have successfully raised rates without triggering a recession.

As a first step, the Fed is expected to raise borrowing rates several times this year, starting this week with a modest quarter-point increase in its benchmark short-term rate. Policymakers will also discuss when and how quickly to cut the $9 trillion in bonds held by the Fed, a step that would also tighten credit for consumers and businesses.

Phil Dean, former state budget director and senior public finance fellow at the University of Utah’s Kem C. Gardner Policy Institute, said interest rate hikes by the Fed lead to higher borrowing and financing costs, which will impact Utah consumers and businesses. in various ways.

“Rising interest rates at the monetary policy level leads to higher rates and lower activity for the things we finance,” Dean said. “Home loans, auto loans, investments in business equipment, buildings will become more expensive as rates rise.”

Dean said the challenge for the Federal Reserve’s strategy on its planned round of rate hikes will be to strike the right balance between reducing inflationary pressures but not hampering overall growth in the US economy.

And it’s a goal that comes with unprecedented challenges, thanks to the trillions of dollars injected into the economy over the past two years in an effort to manage the impacts of COVID-19 and, more recently, the economic fallout. of Russia’s attack on Ukraine. .

“The Fed has never had to deal with this huge level of fiscal stimulus, much of which is still in personal and business bank accounts,” Dean said. “It’s unclear how this money can be spent and it represents a surplus, of sorts, that is very difficult for the Fed to predict as it changes its monetary policy.”

Dean noted that Utahns who have fixed-rate loans for large purchases like homes and vehicles are better protected personal finances than those whose large loans have variable interest rate clauses. Additionally, those in debt on things like variable-rate credit cards will see larger, interest-related fees attached to their balances.

The Fed’s upcoming interest rate hike, which is expected to be announced on Wednesday, along with planned talks on trimming bond holdings, represent a dramatic shift from the board’s ultra-low rate policies, which adopted when the pandemic recession hit two years ago.

The Fed, by its own admission, underestimated the magnitude and persistence of high inflation after the pandemic hit. Many economists say the central bank made its job riskier by waiting too long before starting to raise rates.

The average 30-year fixed mortgage rate, which hit a record low of 2.65% in January 2021, has risen to 3.85% over the past three months as Powell signaled Fed intentions and inflation soared.

By raising short-term rates, the Fed hopes to make it more expensive to buy homes and cars and to raise credit card rates and borrowing costs for businesses. The resulting decline in spending should, in turn, slow inflation, Powell told Congress two weeks ago. Strong consumer spending, fueled by stimulus and steady increases in hiring and wages, has clashed with supply shortages to push inflation to 7.9%, the highest rate since 1982.

The main drivers of this rate increase were increases in the cost of gasoline, groceries and housing in the United States.

On Monday, the average gas price, according to daily market reports by AAA, was $4.36 a gallon, a record high for Utah and about three cents a gallon higher than the current national average of $4.33. .

Dean said rising fuel prices can impact consumers on many levels, with the most noticeable extra expense first occurring at the pump when they fill up, and then later the increased costs. goods.

“People see higher energy prices close to home and very directly when they pay to heat their homes or fill up their gas,” Dean said. “But these price increases also trickle down to the market as additional costs for making and transporting goods, which later show up in price increases for those goods.”

Dean also noted that even with rate hikes on the horizon, global interest rates were still near historic lows.

Last month, a Deseret News/Hinckley Institute of Politics poll found inflation to be the No. 1 economic concern for Utahans, with 50% of respondents considering it the most pressing fiscal challenge.

A group of Utah business leaders and economists met last week to discuss how the ongoing Russian military aggression against Ukraine and its related global economic impacts could impact on Utah residents and businesses. Their consensus view is that while Utah’s diverse and successful economy is better positioned than most to weather the fallout from the conflict, further increases in the prices of goods and services are a likely scenario.

Contributor: Associated Press

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