Federal Reserve Expected to Hike Up Interest Rates, Local Economists Weigh In on Impacts

The Federal Reserve is set to deliver an aggressive approach to rising inflation by raising interest rates.

Policymakers are meeting for two days, starting Tuesday, and expected to increase interest by half a percentage point. It’s the largest hike in nearly two decades.

It stresses the urgency felt by the Fed, with inflation climbing at its fastest in 40 years.

But it won’t stop there, local economists say they’ll keep raising the borrowing cost for months to come.

“In the 1980s when the Fed had to raise interest rates, the interest rates were already seven or eight percent, and they raised them to 20%, so we’re going to probably raise our interest rates here from about zero percent to maybe two and a half or three percent when all is said and done over the course of the next couple of years,” says Professor of Economics at Central Michigan University, Jason Taylor.

Raising interest rates is an approach to slowing the economy down. Right now, the demand is so high for food, gas and leisure travel but the supply is falling way short as industries work to bounce back from a two-year pandemic.

Prices surged by 6.6% the past year, ending in March. So the Fed’s approach to lowering the cost, is raising the cost to borrow.

“People aren’t going to buy as much money to buy a new car or a new house,” says Taylor. “On the other hand, people are going to save money.”

But for those who can save, and perhaps should, like retirees, it might be a great time to.

“A lot of times the saver is sort of forgotten,” says Taylor. “All this discussion of interest rates for the last 15 years, the Federal Reserve has kept interest rates at artificially low levels and who’s been really harmed by that are people that want to save, especially people that are at or near retirement age. For them, having the interest rates rise will be a good thing.”

Economists agree that one approach to ending soaring inflation is higher interest rates. But what they don’t agree on is that it may result in another recession.

“It really depends on whether, again, government can get inflation under control and get the economy moving in the right direction,” says Dr. Timothy Nash, Director of The McNair Center for the Advancement of Free Enterprise and Entrepreneurship, Northwood University. “I do think we’re going to be in a recession between now and next summer. How severe it will be depends on what the government does.”

Taylor is more optimistic that a recession can be avoided.

The gross domestic product (GDP)- used to judge economic growth- fell 1.4% in the first quarter of the year, but had a seven percent growth rate ending the last year. Taylor says the decline in one quarter isn’t indicative of a recession, yet.

“When you pump the brakes, you’re going to slow inflation down, but you’re also going to inevitably slow other parts of the economy down as well,” he says. “GDP will fall. Unemployment will rise. This has happened time and again throughout history where we’ve had recessions that have been directly caused by the Federal Reserve trying to rein in inflation, by increasing interest rates and cutting the money supply.”

But these times are “unprecedented” according to Nash. Unemployment remains rather low with millions of jobs still available.

“Sitting here for the first quarter was negative. That was not expected. We had a record number of jobs available. ” says Nash. “So the market is currently sending mixed signals. The government is hoping that they can bring the economy inflation under control without a recession. And I would say most economists are not betting on the government now being able to get rid of inflation without a recession.”

Raising the borrowing cost will impact an already difficult housing market, where areas like Traverse City are working a short supply of housing faced with mortgage rates above 5%, in anticipation of the Fed hike.

It will also impact the auto industry, and Michigan’s state economy with it.

“We’ve seen some unprecedented prices in used cars and then they signaled one of the strongest signals of a recession. When the March [report] came out, we were down almost 4%. So I think that the auto industry is is going to be fine on the new car side, continue to get tighter and and slow on the used car side.”

The Fed will be meeting Tuesday and Wednesday, with their final decision announced Wednesday afternoon.