RICHMOND, Va. — Federal Reserve Chair Jerome Powell bluntly warned in a speech last month that the Fed’s drive to curb inflation by aggressively raising interest rates would “bring some pain.” On Wednesday, Americans may get a better sense of how much pain could be in store.
The Fed is expected at its latest meeting to raise its key short-term rate by a substantial three-quarters of a point for the third consecutive time. Another hike that large would lift its benchmark rate — which affects many consumer and business loans — to a range of 3% to 3.25%, the highest level in 14 years.
In a further sign of the Fed’s deepening concern about inflation, it will also likely signal that it plans to raise rates much higher by year’s end than it had forecast three months ago — and to keep them higher for a longer period.
Dr. Tom Arnold is a finance professor within the Robins School of Business at the University of Richmond. The professor urged homeowners not to rush paying off a mortgage with a low interest rate.
Arnold warned Central Virginia families against overspending and to save as much money as you can. Excessive borrowing has also emerged as a critical financial issue during the rise in inflation.
Bankrate.com reports that credit card borrowing costs have reached their highest level since 1996.
“If you can keep your credit card debt down and watch out for the Buy Now pay later installments with free of interest. It's not that they're bad in and of themselves. But if you use it as an additional credit card — then you're starting to build up debt at a point where if you take out a loan just to eliminate your credit cards, you're going to be paying a higher interest rate the longer you wait,” Arnold explained.
He believed that interest rates hikes are overdue.
“Although it seems like the [federal reserve is] raising the interest rates really quickly right now, there's no doubt that maybe they were too low for too long before then,” Arnold stated.
Economists expect Fed officials to forecast that their key rate could go as high as 4% by the end of this year. They’re also likely to signal additional increases in 2023, perhaps to as high as roughly 4.5%.
Short-term rates at that level would make a recession likelier next year by sharply raising the cost of mortgages, car loans and business loans. The Fed intends those higher borrowing costs to slow growth by cooling off a still-robust job market to cap wage growth and other inflation pressures.
Yet the risk is growing that the Fed may weaken the economy so much as to cause a downturn that would produce job losses.
