Experts hope Federal Reserve rate hikes tamp inflation and avoid recession

PHILADELPHIA (WPVI) — The Federal Reserve hiked interest rates by a hefty three-quarters point on Wednesday for the second consecutive month in its most aggressive attempt to tame high inflation in three decades.

The Fed’s move will raise its policy rate, which affects much consumer and corporate credit, to a range of 2.25% to 2.5%, the highest level since 2018.

The central bank’s decision follows inflation rising to 9.1%, the highest annual rate in 41 years, and reflects its relentless efforts to rein in inflation across the economy. By raising lending rates, the Fed is making it more expensive to get a mortgage, car loan, or business loan. Consumers and businesses are then likely to borrow and spend less, cooling the economy and slowing inflation.

SEE ALSO: The Federal Reserve hikes interest rates by 0.75%, another big hike to curb inflation

The Fed is tightening credit even as the economy begins to slow, raising the risk that its rate hikes will trigger a recession later this year or next. Rising inflation and fears of a recession have shaken consumer confidence and raised public concerns about the economy, which are sending out frustratingly mixed signals.

Experts say that after the fourth rate hike this year, there will be some softening.

“I worry that the Fed is moving too fast and too aggressively. You’re going to break something. They will most likely try to break inflation. There’s a chance they’ll wreck the economy,” said Ryan Sweet, senior director of economic research at Moody’s Analytics.

Sweet says interest rates on mortgages, cars and credit cards will rise immediately, leading to a multiplier effect across the economy that will constrain the money supply and lower prices.

But it’s a delicate act.

“It costs the average household $493.00 per month to buy the same shopping cart this year as last year. That’s a huge burden, and the Fed wants to lower it. But she also doesn’t want to do it too quickly and aggressively where the job market is suffering,” Sweet said.

However, he says the job market is very resilient right now.

“We’re creating a boatload of jobs, 400,000 to 500,000 jobs a month. It’s hard to say the economy is in recession when the job market is this strong,” Sweet said.

Charles Weeks, the founder of Barrister Financial in Center City, feels that most sectors of the economy have already retreated and what else must soon follow.

“I have a feeling we’re going to see a little pullback in real estate, and at that point the Fed will probably be done with its tightening cycle,” Weeks said.

He also sees the recent decline in certain stocks and bonds as an opportunity for clients.

“After something has fallen in price so much, it’s a good time to buy,” Sweet said.

But above all, he says – don’t panic, even if interest rates are rising.

“This is a normal cycle. We have recessions, we have expansions. We have contractions. It’s a normal part of the economic cycle,” Weeks said.

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