With the inflation rates showing no signs of cooling down, the Fed is moving to stop the economy from overheating by increasing interest rates but without leading to a downturn. A hoped-for ‘soft landing’ appear less probable at the moment. The inflation rates continue to remain at a record high, the highest seen in over 4 decades, and experts say that the stimulus checks are at least partially to blame.
The Federal Reserve’s decision to hike the rate steeply could have unintended but utterly foreseeable consequences for the economy. The biggest setback would be a sharp spike in unemployment figures.
The Federal administration pumped in huge amounts of Stimulus Checks to prop up businesses during the pandemic and stop them from going out of business as the whole economy shut down immediately after the pandemic.
The immediate and generous support helped stave off unemployment, starvation, and redundancy for numerous Americans. The stimulus check put food on the table and helped families continue paying off utility bills, rent, and other expenses.
The generous third stimulus check even helped people pay off their debts and set aside a part of their earnings as savings, a first for many families in their lifetime.
Federal Reserve Hike Could Mean Further Price Rise, Tumbling Stocks, And Higher Borrowing Costs, A Pain For Citizens Without Stimulus Checks
The central bank appears to be stuck at a dead end. Three successive hikes in interest rates this year don’t appear to have the desired effect on inflation rates. On the other hand, the increase in the cost of borrowing could cause the US economy to shrink further, pushing America into a recessionary economy. This is something the administration had been able to avoid even during the difficult stage of the pandemic.
The high borrowing rate could work against what it was intended for in the first place, which was to bring down the inflation rate. Raising the rate of interest appears to be the only course of action open at this stage for the Fed to counter the record inflation.
A spike in the cost of borrowing, which includes mortgages, credit cards, other similar instruments, and also loans, will push consumers to have low spending power. This will cause them to buy fewer items and spell doom for the economy.
The cooling down of demand will upset the supply and demand equation and push down prices further. And this appears set to happen soon.
Inflation Continues At Record Rate And The CPI Remains Above The 8.5% Mark
The sustained high of the consumer price index which is now at 8.6% has not been faced by the federal administration in over 4 decades. It was only in 1981 that the economy was so badly hit, something that did not happen even during the deep recession faced by the US economy in 2008 and 2009.
Jerome Powell, the Federal Reserve chief has already warned that it would not be prudent to expect anything even close to a soft landing – a robust labor market and a drop in inflation to 2%.
In an interview, he admitted that it would be a challenge to immediately achieve that for several reasons. He said that the low unemployment rate was one of them as the labor market remains extremely tight. Inflation, on the other hand, remains consistently high, which is the greatest worry for the administration.
A Measure Of The Havoc Being Caused By High Inflation In Absence Of Support Measures Like The Stimulus Check
The May inflation figure rose by 8.6% against the previous year’s figures and remains at its highest since 1981. The Bureau of Labor Statistics revealed that the price of gasoline rose by 4.1% in May, bringing the total increase to 48.7% in one year.
Food prices also continued to move up and increased in May by 1.2%. The increase over the year comes to 10.1% in all. The purchasing power of the dollar has sunk to a record low. This has made everything you purchase more expensive, though wages have not increased at the same rate.
More and more citizens are being forced to remain limited to immediate expenses as wages are not keeping up with the rate of inflation.
Pandemic Main Cause Of The Record Inflation Figures
The mess that the economy is in now can be attributed much to the effect of the pandemic. The US economy almost shut down when the world went into lockdown in March 2020 with the onset of the COVID-19 pandemic. Millions were laid off and businesses had to shut their doors. The supply chain across the world was severely disrupted and remained closed for months. The US government had to step in with its stimulus check program. The stimulus check program included three stimulus checks. The stimulus checks were directly mailed to families.
This affected the manufacturing and flow of goods to and from the US as it remained shut down for weeks. But the simultaneous inflow of stimulus check funds directly into the hands of American citizens led to a spike in demand for consumer goods at the expense of spending on services.
The pandemic distorted both the demand and supply aspects of the US economy. Though there has been an immediate easing of the impact caused by the pandemic, there continues to be disruption in labor and the supply side. This has caused a severe shortage in the supply of steel, electronic equipment, microchips, and many other goods. This has severely disrupted both the manufacturing and construction sectors.
The subsequent disruption caused by variants of the virus has led to further shock in the world economy. This is particularly true of China, which exports much of its goods to the US.
The prices of fuel have been hit also by the war in Europe. The Fed chairman Powell confirmed the finding so the World Bank about these external factors and said they were challenging as they remained outside the control of the central bank.
Increase In Interest Rate Will Affect The Low And Middle Income Group In Absence Of A Stimulus Check
The increase in interest rates as set by the Federal Reserve will mean that buying a car or a home will become more difficult as you would end up paying much higher interest rates. It would be more expensive to also refinance your student loans or existing mortgages.
The Fed hikes will also drive up interest rates on credit cards, which proved a lifesaver for many Americans before they received support through the federal stimulus checks.
The hike in rates will also hit the stock and cryptocurrency market, which will be negatively impacted. But it will also mean a slightly better return for your savings accounts. Several banks have already increased annual percentage yields.