Rate hikes to affect businesses, consumers, expert says

Consumer prices surged 8.6% last month from 12 months earlier, prompting the Federal Reserve Board this week to raise the federal funds rate by 0.75%. That will affect consumers and businesses in various ways, experts say, but eventually should work to tame inflation. (AP file photo/Nam Y. Huh)

Recent rate increases by the Federal Reserve, including a big one this week of 0.75%, reflect a serious desire to bring prices down on everything from lettuce to laptops, but with inflation festering at 8.6%, regulators have a long way to go, according to Brian Henderson, chief investment officer at Bank of Oklahoma.

In weeks leading up to the Fed’s most recent meeting, many thought it would raise rates by 50 basis points – by half a percent. But outlooks changed after Consumer Price Index data released June 10 showed that inflation jumped by a higher-than-anticipated 1% between April and May. The Fed’s more aggressive response indicates growing concern about inflation and may signal increased potential for a sharper slowdown of the economy in months ahead.

Although only some aspects of a typical consumer’s finances, such as interest on credit cards, are directly affected by the Federal Reserve rate, people’s wallets and nest eggs likely will be indirectly affected. For example:

• Savings: The rate increase is good news for savers, as interest rates paid on bank deposits, including savings accounts, generally go up (or down) along with the Federal Funds rate, though not in exact same increments. Money market yields also will increase with the rate change. Although interest rates on accounts and money market yields won’t go up the full three-quarters of a percent, they may rise half that much, Henderson said.

• Variable-rate loans, including home equity lines of credit, adjustable-rate mortgages and credit card debt. Consumers will pay higher interest on variable-rate loans tied to the Federal Funds rate. Credit card interest rates, for example, move up and down with the prime rate, which is based on the Federal Funds rate. Businesses with outstanding variable-rate loans, such as those that finance equipment on revolving lines of credit, also will feel rate hikes. One option for businesses is to refinance onto longer-term, fixed-rate equipment financing options in anticipation of additional rate hikes.

What might indirectly be affected?

• Jobs: Inflation means more than just high prices; it also means higher wages. To reduce wage inflation, the Fed has to lower the demand for workers, Henderson said. “Companies have to start raising prices for services to offset the labor market wages they’re paying,” he said. “It can spiral out of control like what we had in the 1970s and ’80s.” The Fed’s series of rate hikes should work to quell wage inflation by encouraging businesses to delay expansion plans, hiring and other spending. This means that workers may see more hiring freezes and possible layoffs. However, by raising rates in increments rather than slamming the brakes on the economy, the Fed is working to avoid mass layoffs from occurring, Henderson said.

• Investments – at least for the short-term. “It’s a tough environment right now for both the financial markets and the economy with the Fed hiking rates, the war in Ukraine, COVID-19 restrictions in China and inflation in the U.S.,” Henderson said. The markets don’t like uncertainty, so your investments may face some difficulty in the short-term, but it’s important to maintain a longer view when looking at your retirement savings. “Investors saving for retirement should stick to their long-term plan. Retirement contributions made now are investing in the highest yields we have seen in nearly five years, and valuations in stocks based on current earnings estimates are very reasonable.”

Holding that longer view also should help people to keep current economic conditions in perspective, Henderson said.

“The economy is going to slow, but that is ultimately good for the United States and good for consumers as prices come down,” he said.



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