How the Fed’s interest rate hike will affect the economy and consumers

MINNEAPOLIS–The US economy is both an ocean and an ecosystem where money flows in all directions. In good times, growth and prosperity can seem like a high tide. Debt and unemployment can be like a low tide.

At the top of the economic food chain is the US Federal Reserve, the central bank of the United States.

The Fed, as it’s called, lends money to big banks and local banks, which lend money to help businesses grow and people buy houses, cars and whatever. they could put on a credit card.

Money, however, costs money. And paying interest on those loans is how the US economic ecosystem sustains itself.

How much it costs to borrow money depends on greater forces.

Abigail Wozniak, senior economist at the Minneapolis Federal Reserve, says the decision to raise interest rates is a balancing act.

“Balance and compromises is something we talk about all the time here,” she said.

In March 2020, after the outbreak of COVID-19, the US government had to weigh in to save lives and protect economic livelihoods. At first, it was impossible to do both. The stock market crashed and unemployment soared to 20%.

Wozniak says you can clearly see that painful moment on the charts.

“There are charts upon charts that I can show you that involve big swings. When we plot the data and put the pandemic at the end, it makes the Great Recession look small because the changes were so important and dramatic,” she said.

To help stop the bleeding, President Donald Trump signed into law relief packages that included direct checks to American households and payroll assistance for small businesses. President Joe Biden has followed through on that plan with fiscal policy that totals $1.9 trillion.

The Fed also helped by changing its monetary policy to allow more emergency lines of credit for banks. It also lowered its benchmark rate, called the federal funds rate.

So how does the Fed know if it’s doing too much, too fast?

“I think the simplest answer to that is that we’re looking at a lot of data, and so many of us are paying attention to the indicators that are coming in, trying to understand in real time where the economy is and where it’s going in several months. and many years,” Wozniak said.

After March 2020, the economy grew as many expected. Moody’s “Back to Normal” Index reached 92% on June 14, 2022. We are also seeing record unemployment rate in Minnesota and across the country.

But it’s not all good news.

As you have no doubt noticed, there has been a huge demand for goods and services which have been reduced during the closures. Add to that a war in Ukraine and tensions in Asia and the Middle East, and you have skyrocketing inflation, which has reached its highest level in 40 years.

The average American family spends $350 more per month to buy the same amount of goods they bought last year.

So it’s no shock that the Federal Reserve is trying to restore balance by raising this benchmark interest rate. The Fed announced on June 16 that it increase rates by three-quarters of a percentage point, the steepest climb since 1994.

Now that it is more expensive for banks to borrow money, they will in turn make mortgages, car loans and student loans more expensive. Of course, pumping the breaks too hard means we could soon see whiplash.

What you can do to prepare if the United States plunges into a recession

CBS News business analyst Jill Schlesinger said now is the time to save.

“Maybe you went a little crazy, maybe you spent the first 6-12 months freely after the lockdown. It’s a good time to check if you have 6-12 months of my expenses. subsistence set aside in a boring savings or money market account.”

The Federal Open Market Committee meets every eight weeks and that’s when it could potentially raise rates. They will do it in July and then three more times until 2023. Whatever they do impacts all of us.

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