A Big Interest Rake Hike is Coming: What it Means for NJ Residents
The Federal Reserve is expected to announce a half a point interest rate increase on Wednesday afternoon, which will send mortgage and credit card rates higher, and increase the cost of getting a home equity loan.
According to Rutgers University economist James Hughes, with inflation continuing to surge, the Fed doesn’t really have a choice.
How rising interest rates puts the brakes on inflation
He said the idea here is fairly simple.
“By raising the cost of something you lower demand, and when you lower demand price increases start stabilizing.”
Hughes said one example of this would be the red-hot Jersey housing market, which has been on a tear for the past couple of years.
“By making mortgages more expensive you lower housing demand, and if housing demand is lowered enough those price increases for homes are not going to increase very much,” he said.
He said the Fed is raising rates by half a percentage point instead of the traditional quarter of a point because inflation took off and the Fed was caught off-guard.
“If they see inflation in the future they try to get ahead of the game and start increasing rates first, this time though inflation has surged, so they’re way, way behind the curve,” Hughes said.
How long will it take to slow down inflation?
He said no one really knows the answer to that question.
“They’re going to be watching very closely with all their metrics, what is the impact each time they increase interest rates, is it having a measuring effect,” he said.
Hughes pointed out the sky-high price of gasoline is linked to the price of oil, which is being driven higher by the Russian invasion of Ukraine, so prices at the pump are likely to continue to stay high until that conflict is resolved.
He said you can’t reduce inflation unless you reduce the size of economic growth and “unfortunately, it could push growth into a negative territory and that means a recession.”