A Discussion of Interest Rates Increasing and The Rest of Us.
As a freelance writer, I am privileged to work with business leaders and creative influencers in multiple industries.
People are talking about the Federal Reserves’, (The Fed) increase of interest rates.
When asked to write a blog piece about this topic, I had to consider if it fits into beauty, travel, and lifestyle posts.
Inflation impacts all aspects of our lives, and we will feel the effect of increasing interest rates.
Jumping in, I educated myself by reading articles on the following topics:
The Federal Reserve
How Raising Interest Rates Affect People and Business
How The Supply Chain Affects Inflation
Who Profits and Who Loses With a Rate Increase
How Competition Affects Inflation
What Unusual Factors are Causing Inflation
What Other Measures are Offered to Reduce Inflation
There are many informative articles regarding increasing interest rates, and I have included links so you can dive in further.
- To start, The Federal Reserve System is the country’s central bank, made of 12 regional Federal Reserve Banks, located in Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, St. Louis, and San Francisco.
- The Feds’ purpose in part is to:
- Conduct the nation’s monetary policy
- Monitor and engage in U.S. financial system
- Monitor individual financial institution’s impact on the financial system as a whole
- Provide services to the banking industry and U.S. government
- Consumer-focused supervision and examination
- Conduct research and analysis of consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.
- You can read more about The Fed’s purpose in depth on this website: https://www.federalreserve.gov/aboutthefed.htm
And so it begins…
On the 23rd of December 1913, President Woodrow Wilson signed the Federal Reserve Act, creating The Federal Reserve. The Act responded to the Panic of 1907.
During the Panic, the public withdrew their money in-mass from their financial institutions after a series of bad banking decisions, creating public distrust and leading to a recession (a period of economic decline during which trade and industrial activity reduced).
Jerome H. Powell
Today the Fed is led by Jerome H. Powell. Powell was appointed to the Federal Reserve Board by President Obama in 2012. He was appointed as Chairman by President Trump in 2018.
Powell was re-nominated by President Biden in 2021, taking office for his second term in 2022 after an 84-13 Senate Vote.
Powell has recently communicated at an economic conference that higher borrowing costs will likely cause short-term pain for families and businesses.
Unemployment may be higher, and the economy may grow more slowly. Powell stated allowing high inflation to continue unchecked would be worse. “Without price stability, the economy does not work for anyone,” he said.
The Fed has raised rates by 2.25 percentage points since March.
More rate hikes are expected, including at the Fed meeting this September, “We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply and to keep inflation expectations anchored.” Powell said.
In late August, Powell stated the central bank committed to bringing down inflation even if it causes some economic pain. Powell pledged that he and his colleagues would keep raising interest rates until they’re confident inflation is under control.
With the continued increase of interest rates by The Fed, the Ukraine-Russian war, a slowed supply chain, an increase in demand, and the effects of the water shortage in China, we can expect to see the results in mortgage rates, personal loans, and business expansion, student loans, home and car loans, banking, savings accounts, the everyday operations of businesses.
“It’s very important that people are aware that their credit card rate is going to go up,” says Beverly Harzog, a credit card expert and consumer finance analyst for U.S. News & World Report. “And if you do have credit card debt, it’s time to take steps to get rid of that.”
Increasing interest rates means higher APRs, and longer debt pay-off time for cardholders. We currently have a growing credit card debt, with credit card balances increasing by %52 billion nationwide in the third and fourth quarters of 2021. The average American credit card balance in 2021 was $5,525.
The average credit card interest rate is 19.70% for new offers and 15.13% for existing accounts, according to WalletHub’s Credit Card Landscape Report.
This insight led me to ask how interest is charged on credit card balances:
Divide your credit card APR by 365 (the number of days in the year) to find your daily interest rate. Multiply your balance by your daily interest rate. Multiply your daily interest rate by the number of days in your billing cycle.
So at a 15% interest rate:
15 divided by 365= .04109589 times 52 billion = 2.14 times 30 ( a 30 day billing cycle) = 6.42 billion dollars a month.
The banks are making 6.42 billion dollars a month on average, 76.8 billion a year from credit card debt.
As mentioned before, credit card debt isn’t the only thing affected by the Fed raising the interest rate. New homeowners will have a hard time getting loans. Homeowners will have a hard time selling their homes, and the value of their homes will decrease over time.
A higher federal funds rate means higher mortgage rates for buyers.
The amount of pre-approval from a lender is based on your downpayment and the amount you can afford to pay each month.
This is based on your debt-to-income ratio. With a higher monthly payment, the loan amount will be lower. For first-time buyers, without a property to sell, they won’t have a large down payment. Finding homes that fit into a workable price range will be a challenge.
Sellers will typically lower the price of their homes as interest rates rise and there are fewer offers on their homes. This transition takes time. Currently, the housing market does not have enough homes for sale to keep up with demand. This will keep property values up for some time, pricing some buyers out of the market.
Higher rates mean higher mortgage payments. This would mean spending a bigger chunk of your monthly budget on your house.
Interest rates increasing also impact small businesses and their ability to service debt. According to the MetLife-Chamber poll, 39% of small business owners have taken out a small business loan to offset higher costs in materials and supplies resulting from the surge in inflation.
Raising interest rates affects their ability to borrow more or pay back current debt.
Exacerbation of worker shortages
Over the last two years, tens of millions of workers have left the labor force, leaving large and small businesses alike struggling to fill open positions. Those workers taking positions have gained an increase.
Small business has the cost of transport and distribution of inventory. The supply chain has been negatively impacted by Covid, the Ukrainian and Russian war, and the drought in China. Supply chain issues increase costs across the board.
Increased costs and increasing interest rates will make it challenging for small businesses to find the capital they need to expand after having made it through the pandemic.
Taking a closer look at the supply chain, Donald Kohn, former vice chair of the Fed’s Board of Governors, was interviewed by Rachel Martin for NPR.
KOHN: Well, I think a couple of things happened. One is that some of the disturbances from the supply shock side of the economy – from COVID, waves of COVID infections, and the Chinese shutting down their economy in order to deal with COVID infections – have kept the pressure on the supply side much longer than I or other people anticipated. Then you had the Russian invasion of Ukraine, which also – which took a lot of wheat and other food off the market. And the sanctions on Russia have taken oil and natural gas off the market. And so I think part of what we got wrong is there are repeated supply shocks. But the other part I think I wasn’t as aware of as I should have been is just how strong demand has been, just what – how much the fiscal policy, the budget deficits, and the easy monetary policy pushed up demand and has kept it strong.
There are high inflation and very strong demands from people for goods and services, causing that inflation much stronger than can be produced by the available labor force. So people are bidding against each other for the goods and services, for the stuff they want to buy. The labor force can’t produce it. People are bidding for the workers to produce it. That’s driving up wages. So we’ve got prices and wages going up. The Fed – the rock and the hard place is the Fed wants to damp down that demand for goods and services, but not so far as to cause people to be unemployed. So they want to keep the labor market going well.
“The Federal Reserve got inflation wrong. And now they’re trying to correct their mistake by pretty quickly hiking interest rates. And that will slow the economy,” Aaron Klein, a senior fellow at the Brookings Institution, told NPR before another recent rate hike.
Supply & Demand
The supply chain is one aspect of the problem we face, and another is the demand side of the equation. Inflation is occurring in places where wage growth is not particularly strong. Take food at home, the cost is rising faster than food away from home. This is related in part to the lack of competition. The market is not competitively strong. We see a large amount of market concentration and fewer competitors.
So with all these moving parts, the pandemic, war, drought, supply chain issues, supply and demand issues, and increasing interest rates, who is profiting?
Interest rates and bank profitability are connected, with banks benefiting from higher interest rates. When interest rates are higher, banks make more money, by taking advantage of the difference between the interest banks pay to customers and the interest the bank can earn by investing.
Other than raising interest rates, what other things are on the table to reduce inflation?
Boosting productive capacity, which will ease inflation by increasing supply.
The Emergency Price Stabilization Act Combined with the Inflation Reduction Act presents an alternative logic of economic policymaking.
The Emergency Price Stabilization Act:
This bill establishes a competitive grant program within the Administration for Children and Families (ACF) for family stabilization agencies to provide emergency relief to children, youth, and families experiencing homelessness. These agencies include current ACF grantees or subgrantees, Indian tribes, tribal organizations, Native Hawaiian organizations, and other organizations with expertise providing direct services to those experiencing homelessness. Recipients may use grant funds for, among other purposes, personnel costs, personal protective equipment, and other supplies to mitigate the spread of COVID-19 (i.e., coronavirus disease 2019), as well as payments for security deposits and other housing-related needs.
Additionally, the ACF must award the grants based on factors including the need for the services in the area served by the agency and specified allocation and prioritization requirements. not only provides an escape route from the looming dangers of a recession or even stagflation.
Combined with the Inflation Reduction Act, it presents an alternative logic of economic policymaking.
The Inflation Reduction Act:
- Expands Medicare benefits: free vaccines (2023), $35/month insulin (2023), and caps out-of-pocket drug costs to an estimated $4,000 or less in 2024 and settling at $2,000 in 2025
- Lowers energy bills: cuts energy bills by $500 to $1,000 per year
- Makes historic climate investment: reduces carbon emissions by roughly 40% by 2030
- Lowers health care costs: saves the average enrollee $800/year in the ACA marketplace, allows Medicare to negotiate 100 drugs over the next decade, and requires drug companies to rebate back price increases higher than inflation
- Creates manufacturing jobs: more than $60 billion investment will create millions of new domestic clean
- Invests in disadvantaged communities: cleaning up pollution and taking steps to reduce environmental injustice, with $60 billion for environmental justice
- Closes tax loopholes used by the wealthy: a 15% corporate minimum tax, a 1% fee on stock buybacks, and enhanced IRS enforcement
- Protects families and small businesses making $400,000 or less
Faced with recurring global emergencies we look to Congress to protect workers, and offer solutions for economic prosperity. Relying on The Fed to stop inflation does not address the problems it will create for our citizens.
As I said, there is a lot of discussion going on around interest rate increases and inflation. Normally I like many of my neighbors, complain about the cost of goods and services, the price of gas, and food costs at the supermarket. I am finding my clients across many fields of business are having heated discussions and raising interesting if not alarming points.
Here is a Management Consultant’s Insights:
“If there is a rate increase, it should only apply to new purchases or new draws on credit lines.”
“The FED is raising interest rates drastically transferring wealth from the American people’s savings to the banks because the “FED” deems American families balances are rising. This enables American workers to have more choices about how to shape their careers or more negotiating leverage in the market”
“The FED argues that it needs to tamp demand down when the inflation is higher than 2%, despite bluntly knowing the inflation is due to supply-side disruptions. They do this because they have NO tools to influence supply side attributes. So they are applying a solution looking for a problem. When the US Senate committee asked the FED chairman, if these interest increases would lower the price of gas, food, and other consumables, the FED chairman testified “NO”. So why is the FED increasing rates at a time of increasing prices pressuring the American people and decreasing GDP for 2 months?”
“With corporations making radically high profits, there is a significant opportunity for improvement in supply chain efficiencies. The only inducement to increase these inefficiencies is a higher corporate tax rate say from 21% to 25-28%.”
“The FED argues they have an object to maintain inflation at 2%. At 2% inflation wages stagnate or depress. If anything the consensus of the American people is to have wage increases of 5-7% annually. The number one financial asset of American families is their home, with US home prices increasing, this increases the wealth of the average American family.”
“Why is the FED doing what they are doing,: They see American wages and wealth as a cost commodity to hold down on behalf of major businesses, stock prices, and CEO’s bonuses. As well, a strategic objective is to hold American labor wages stagnate, so they will eventually come on par with “LOW” wage countries. In summary, the FED is primarily concerned with the well-being of multinational corporations’ shareholder value. This is depicted when the FED purchased major corporations’ stock to prop up the prices during the pandemic.” –
“Is this Loan Sharking or Another Bail Out?”
“In a supply chain-constrained market, INCREASING INTEREST RATES increases costs and INCREASES INFLATION.”
“To reduce prices, you need increased competition – new market entrants. New entrants need cheap money.”
“The FED is raising interest rates drastically transferring wealth from the American people’s savings to the banks because the “FED” deems American families’ savings balances are rising. This enables American workers to have more choices about how to shape their careers or more negotiating leverage in the market.”
What are your thoughts? Please let us know in the comments.