High prices are the culprit, as supply-chain challenges keep inventories tight. In March, prices were up 8.5% over a year before, well beyond the Fed's target of 2% inflation. Consumer spending continues to grow, trying to keep pace with rising prices. The only tool available for the central bank is to raise the cost of borrowing money, with an expected .5% rate hike.
"They are legitimately trying to pull back demand, to make there be fewer buyers to try to tame those price increases," says Jake Clopton of Clopton Capital. All that means that the cost of keeping debt will go up: Credit cards with, typically, variable rates will see higher costs to carry balances. Car loans for vehicles that have already seen skyrocketing prices will be more expensive. Though home mortgages, which are not directly tied to the Fed increase, have been ticking up, adjustable rate loans, and home equity loans will definitely go up.It is all intended to cool spending.
"For the vast majority of people, who budget every month, if you add another $500 in cost, just to do the things that you're already doing, you're gonna' pull back. You have to pull back," says Clopton. Interest rates have been so low for so long that a lot of consumers, particularly younger ones, have little appetite or experience with expensive borrowing. Even with the Fed's expected hike, rates will still be a fraction of the nearly 16% last seen in 1981. This is a different time, of course, and this latest nudge may be enough to start bringing prices under control.
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