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Economy 12 minutes ago (Sep 21 2022 02:48 ET)

© Reuters. The exterior view of the Marriner. S. Eccles Federal Bank Building can be seen in Washington, D.C., U.S.A, on June 14, 2022. REUTERS/Sarah Silbiger

Lindsay (NYSE: ) Dunsmuir, and Ann Saphir

(Reuters) – Wednesday’s Federal Reserve interest Rate increase was the third consecutive 75-basis-point hike. This is part of its campaign to raise borrowing costs enough to lower 40-year-high inflation.

The goal is for households and businesses alike to cut back on their spending and decrease demand for goods and services. This will reduce price pressure.

However, the process is not going to be simple. For months, regular Americans have felt the effects of inflation. The Fed’s efforts so far to lower it have already made it difficult for many consumers to purchase items like a house and a car. There are other things that have not changed, however, like a Rise in unemployment and even a recession.

Here’s how it might look:

UNEMPLOYMENT RISING, INFLATION STILL HIGH

Fed Chair Jerome Powell stated that the rapid, forceful actions taken by the central bank will come with “unfortunate consequences”, including an increase in unemployment. It is currently at 3.7%. According to Wednesday’s projections, Fed policymakers anticipate it will rise to 4.4% by next year.

Chris Waller, Fed Governor, warned earlier this month that the Fed would not be happy with the unemployment rate rising to 5% before policymakers begin to consider any changes in strategy. A rise to that level – which could mean more than 2,000,000 jobs being lost – is consistent with an economy in recession. In order to give an example, in the past three recessions, the unemployment rate peaked at approximately 14.7% 9, 5.5% and 5.5% in 2020 respectively.

However, none of those recessions were preceded with inflation at a level that is comparable to today. This fact could make any coming downturn worse.

WAGE GROWTH LOWS, FAR FEWER JOB OPENINGS

August saw wages rise at 5.2% per annum, a strong pace, with the lowest-paid workers experiencing the greatest increase in their paychecks. The good news doesn’t end there. The Fed’s overall inflation goal of 2% is not achievable if wage growth continues at the same pace as policymakers believe. They are working to slow it down. They worry that if these outsized wage gains continue, high inflation will become embedded in the economy and create a spiral of self-perpetuating instability.

Wage gains have been strong because of the intense demand for labor. This pool has just recently regained its prepandemic size, despite the fact that the economy has grown. Nearly two job openings are available for every job seeker. Fed policymakers hope that businesses will respond to rises in interest rates mostly by cutting hiring and not with total layoffs. If inflation slows down, fewer workers will have less opportunity to earn a living.

Fed policymakers project that inflation will fall to 2.8% in the next year. This is according to projections released Wednesday.

SAVINGS RATE WILL RISE BUT SO WILL RATES ABOUT CONSUMER LOANS

In particular, online institutions will see an increase of the interest rate for savings accounts. This will affect households. However, banks are generally slow to pass along Fed rate increases to savers. They do so at levels that are typically much lower than the central bank’s policy rate and currently inflation.

Finance companies will raise rates on auto and consumer loans. These rates are usually higher than the benchmark rate of the central bank.

Buying a home is more affordable, but rented homes are still very affordable.

The housing market is the most affected sector of the economy. Rate hikes by the Fed have been the most severe and rapid. Mortgage rates doubled in eight months to an average rate of 6.25% on a 30-year fixed-rate mortgage. There has been a drop in home sales. However, because there is still a shortage of homes, prices have remained steady at $389,500 in August. This is still 7.7% more than a year ago. The monthly mortgage payments for a median-priced home have increased by almost 60% to $1940 due to the increase in interest rates. Oxford Economics estimates that roughly 17 million households have less income than last year to be eligible for a mortgage on a median home.

Rising rent prices are also pushing down incomes. There is little relief for at least the next few month. Based on a weighted-average of the two main rentindices, the rate was 6.4% in August, compared to one year ago. However, the 3 month annualized rate rose to 8.6% which “suggests that rents continue to accelerate higher,” said Ryan Wang, U.S. economist, HSBC.

FOOD AND GAS PRICES: THE FED DOES NOT CAN DO MORE

The Fed may raise interest rates to curb inflation but the prices Americans care about most — gas and food — are out of reach. Their cost is determined by global factors that largely affect supply. The 11th consecutive week of declines in gasoline prices in the U.S. has seen them drop to $3.70 per gallon. According to traders and analysts, wholesale gasoline prices will continue to fall as U.S. refiners increase production to replenish low diesel stocks.

The ongoing conflict in Ukraine and severe droughts in Europe, China, and other countries will continue to raise food prices in the United States. These prices have already risen more than 11% since last year, and could rise at least through next year. Russia’s Wednesday announcement that it would send more troops to Ukraine escalates the conflict and could threaten a Black Sea corridor that was established under a U.N.-backed agreement that allowed maritime grain exports out of Ukraine.

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The post Five ways Americans might feel the pain from the Fed’s recent rate hike first appeared on Raw News.