How the Fed Will Impact You

Members of the panel:
John Cochrane, economist and senior fellow at the Hoover Institution
Aris Protopapadakis, emeritus professor of finance and economics at the University of Southern California Business School
Jay Ritter, Joseph B. Cordell Eminent Scholar in the department of finance at the University of Florida

Why did the Fed increase rates? And how will the higher rates affect daily life, from grocery bills to loans?

Bottom line — increased rates are a tool to curb spending, to encourage people to save rather than consume, and thus get inflation under control.
The bad news —you will pay more for certain types of mortgages and new loans.
The good news — it should bring down your grocery prices.

In the experts’ words:
Protopapadakis: “Increasing rates is essentially the only tool the Fed has to combat inflation. The idea is that the higher interest rates slow down economic activity, primarily on the real investment side — corporate and real estate — and therefore slow down inflation. If the Fed overdoes it, which is easy to do, then we could have a recession.
“So loan rates will go up, longer term bond yields will rise, stock prices will fall some, and your bank will pay a little more interest. And within a couple of quarters — maybe sooner in this case — inflation will slow down. It doesn’t mean prices will fall, though undoubtedly some will, it just means that on average they will rise more slowly. There will be fewer job openings, and some people may lose their jobs.”
Cochrane: “The basic idea is that making borrowing more expensive will cause people to buy less stuff, putting less upward pressure on prices. People will also have more of an incentive to save rather than spend money.”
Ritter: “With inflation at 7 percent and short-term interest rates near zero, the ‘real’ interest rate is negative. People have little incentive to save as a result, and spend more, pushing prices up further. To keep rates low, the Fed would have to rapidly expand the money supply, resulting in more inflation. In Turkey, the government’s attempt to keep interest rates low has set off an inflationary spiral, with an inflation rate of over 30 percent per year. The US Federal Reserve is allowing interest rates to rise in order to avoid the type of inflationary spiral that Turkey is currently suffering from.”

How will rising interest rates affect homeowners and other borrowers?

The bad news: Mortgage rates will rise, which will obviously hurt borrowers.
The good news: It will happen gradually, and even after the expected four rate hikes by the end of 2022, mortgage rates will remain historically low.