How will interest rate hike impact the economy?

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(NewsNation) — The Federal Reserve is raising interest rates by 0.5%, it’s highest increase in 22 years, in an effort to slow down a superheated economy.

An interest rate hike like this one will increase borrowing rates for individuals and businesses, and in the hope of the Fed, will curb spending.

This means consumers could see higher borrowing rates on home loans, auto loans and credit cards.

“In some cases, average Americans are going to see impacts right away,” The Hill’s finance reporter Sylvan Lane said Wednesday on NewsNation’s “Rush Hour.” “Interest rates on credit cards, adjustable rates on mortgages, any sort of loan or credit product that has a not-fixed interest rate, that’s going to get more expensive.”

More rate hikes of 0.5% could be on the way, Fed Chair Jerome Powell said at his news conference Wednesday.

“There is a broad sense on the committee that additional (half-point) increases should be on the table in the next couple of meetings,” Powell said.

The raising of interest rates is intended to slow down the fast growing economy and hopefully chop down some of the record inflation rates consumers are being hit with everywhere from the gas pump to the grocery store.

In April, the Fed measured inflation at 6.6%, its highest point in four decades. Powell was “adamant” inflation was too high, Lane said.

“We understand the hardship it is causing,” Powell said. “We’re moving expeditiously to bring it back down.”

Stock markets shuddered slightly Wednesday amid speculation that Powell could soon announce an unprecedented 0.75% increase in interest rates, but surged following Powell’s statement no such increase was on the table.

“A 75-basis-point hike is not something that the committee is actively considering,” he said

“The market is actually up pretty high on the news,” Lane said. “The Fed and Chair Powell have been laying the groundwork for this increase for a month. The Fed doesn’t like to catch the market off guard and the market heard what they heard over the past weeks today.”

An attempt to reduce the Fed’s $9 trillion balance sheet will also be forthcoming. Consisting of mostly Treasury and mortgage bonds, these holdings nearly doubled during the pandemic.

The impact of lowering the balance sheets remains an unknown, however.

“I would stress how uncertain the effect is of shrinking the balance sheet,” Powell said.

Starting June 1, the Fed said it would allow up to $48 billion in bonds to mature without replacing them, a pace that would reach $95 billion by September. At September’s pace, its balance sheet would shrink by about $1 trillion a year.

Many economic indicators, including the job market, are strong right now, leading Powell to believe the Fed can raise interest rates without sending the economy into a recession.

“We have a good chance to have a soft or softish landing,” Powell said.

Lane said this rate hike alone won’t tip the economy into a recession, but there is concern from economists that if supply chain issues and the pandemic affect abroad keep pushing prices higher, the Fed might have to keep raising interest rates, which could cause a recession.

Powell has said he wants to quickly raise the Fed’s rate to a level that neither stimulates nor restrains economic growth. Fed officials have suggested that they will reach that point, which the Fed says is about 2.4%, by year’s end.

The Fed’s credit tightening is already having some effect on the economy. Sales of existing homes sank 2.7% from February to March, reflecting a surge in mortgage rates related, in part, to the Fed’s planned rate hikes. The average rate on a 30-year mortgage has jumped 2 percentage points just since the start of the year, to 5.1%.

The Associated Press contributed to this report.

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