In the coming days, you will hear more about the upcoming Federal Reserve meetings on July 26 and 27, where it will decide whether to raise interest rates for the fourth time this year.
Some analysts are predicting a full percentage point raise, or 100 basis points, which would be the largest since 1989. In June, the Fed raised interest rates by 0.75 percentage points, or 75 basis points: the largest interest rate hike since 1994.
“Part of the issue is that as an inflation control strategy, interest rate hikes are not so great right now,” said Josh Bivens, research director at the Economic Policy Institute in Washington D.C. “I think a lot of the sources of inflation we’re seeing are things that interest rate hikes aren’t going to really get at.”
Interest rates make it more costly to borrow money, so they affect big purchases like homes, cars, and credit card debt we carry over from month to month.
But, as Bivens points out, they do not do much to change the price of everyday purchases like gas and food, which are affected by other pressures such as the war in Ukraine and supply chain shortages among others. It is why Bivens is wary of another big interest rate hike, as he worries too much overcompensation by the Federal Reserve will push the economy into a recession without tackling the underlying problem of higher prices.
“I would just sort of tell people to discount the last inflation number they heard much more than they usually would because we just know so much of it is obsolete,” he said. “So much of the price pressure is oil and food and those prices have gone in a very different direction in the past two to three weeks.”
The Federal Reserve will likely base its decision to raise interest rates on June’s inflation report, which showed prices were 9.1% higher than a year prior, a number much higher than many analysts anticipated, and the largest rise in 40 years.
In the last month, however, the average price of a gallon of gas has fallen by $0.38 in the United States, according to the American Automobile Association. Food prices have fallen for the third consecutive month, even though the price of both food and gas remains well above what it was a year ago.
Bivens notes the significance: falling prices indicate a shifting trend, which is what he says is an important piece of information to pay attention to.
He says if the Federal Reserve overcompensates with another large interest rate hike, it could slow the economy to the point where businesses are deterred from expanding, which would lead to a weaker job market.
“If you’re Starbucks and you’re not opening a new franchise somewhere because interest rates are higher, you’re not hiring the workers to staff it,” said Bivens. “So, the way that this will really affect normal people, the vast majority of them over the next six to 12 months, is in a weaker job market.”