The Fed also announced that it will start reducing its huge $9 trillion balance sheet. Reducing those holdings will have the effect of further raising loan costs throughout the economy.
Personal finance expert Dan Roccato from credible.com answered viewer questions on the rising interest rates during an appearance on “Morning in America”.
Q: Can you explain why the Federal Reserve decided to implement both of these policies or policies, including the higher interest rate together?
Roccato: So basically, we have this balloon out there, the economy, think of it as a balloon, and there’s a lot of air in the economy. What the Fed is trying to do is slowly take some air out of that balloon before it bursts in order to wrestle this beast that we call inflation to the ground.
So they’ve got two ways to do that. One is to make money more expensive. And that’s what they’re doing. They’re raising interest rates. The second is to basically take some of the froth out of the economy by lowering what’s called their balance sheet, right, lowering the amount of bonds that they hold, basically taking some of that money out of the economy.
So think of it as a vacuum cleaner, you’re trying to suck some of that money that was poured into the economy through the pandemic out of the economy to get that balloon just a little bit more deflated.
Q: How long will it take to determine if these Federal Reserve policies are actually working? — Brandon, Texas.
Roccato: What we should expect is over the next few months, we’re gonna see the Fed embark on this policy to take this money to vacuum some of this excess cash out of the economy, raise the price of money with interest rates. And I suspect Brandon is going to be some time, some months yet, before we see how effective that policy is. There’s always a lag time between what the Fed does and how the economy reacts. Let’s see how this thing looks as we roll out of the summer and into the fall.
Q: If I don’t plan to borrow money in the near future, when will these policies directly affect me? — Jennifer, Illinois.
Roccato: That’s a great question. You know, Jennifer, you’re probably thinking, Listen, I’m not borrowing money, what do I care. But if you have a credit card, if you carry a balance on your credit card, guess what, it’s going to get more expensive. So you may not think you’re applying for new loans. But your old credit card debt is going to get more expensive. The other thing is this, Jennifer, if you’re a saver, if you’re maybe retired, or maybe you’ve accumulated some wealth, and you’ve got some money in savings accounts, there’s good news. Finally, without a microscope, you might be able to see the interest rate your bank is going to start paying you. Banks will eventually start paying us more interest. So that’s good if you’re a saver, Jennifer.
Q: Any general money advice for Americans?
Roccato: Reduce your credit card debt, because that’s the debt that’s going to get more expensive really quickly. And if you’re the last person on Earth who hasn’t refinanced your mortgage, now’s the time to do it. Rates are still pretty low, but they’re headed up. And finally, shop around for your best savings account because interest rates are starting finally to trickle up a little bit.
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