Economists Say Fed Interest Rate Hike Is Right Move For Inflation
CAMBRIDGE (CBS) - On Wednesday, the Federal Reserve announced it would raise the interest rate it imposes on banks – which was at virtually 0 throughout the pandemic – up to about 0.25 percent.
The goal is to curb spending and start to slow the economy, which has seen the highest inflation in 40 years as demand maintains while supply chains struggle to keep up. It seems as though everything – from gas to groceries – is more expensive.
Add in the uncertainty surrounding the war in Ukraine, and the economy is facing an unclear future. "It's also dangerous because nobody knows what's going to happen," explained UMass Boston Professor emeritus Arthur MacEwan. "And the worst thing for economic progress is when nobody knows what's going to happen."
Since inflation continues to rise, the Federal Reserve is taking one small step to slow the economy with this interest rate hike. Fed experts signaled that several more interest rate hikes could come throughout the year, raising the interest rate by a projected 2.8%.
The rate hikes will eventually mean higher loan rates for many consumers and businesses.
But economists say now is not the time to worry, but to wait. Inflation is largely driven by consumer perception and expectations. "[People] will say they are worse off, but when you look at their balance sheet, they are probably not," MacEwan said. "I'm not saying everybody's OK, but it's a feeling that you get because you are confronted with inflation on this daily basis."
While the current economic situation is often compared to the worst inflation the country has seen – in the 1970s and 1980s – MacEwan says it doesn't compare. "This is very unlike the situation in the 1970s," he said. "They developed a spiral between wages and prices, and there weren't supply chain problems."
Back in 1980, to fight the severe inflation, which was nearly double the rate now, the Federal Reserve at one point raised interest rates to 20%. "It led to a severe recession," MacEwan explained. "Stopped inflation! But a lot of people suffered."
For that reason, he feels the Fed's current small hike is the right move. "If you have a small flame in your kitchen, you better do something about it," he explained. "But if the fire department comes along and sprays your house with tons of water, the water damage will be much worse than the small kitchen fire."
In other words – it's better to take small steps to pump the brakes than take any moves that could drastically swing the economy in a very negative direction.
The takeaway: don't panic, and wait. Most Americans will not feel the effects of this hike in their wallets or any adjustable mortgage rates for quite some time and for now, only to a small degree. Plus, many economists predict that the supply chain issues won't last, which could help lower the cost of goods.
