Increasing Interest Rates Come As Part Of Addressing Inflation

The federal reserve has increased interest rates, and is expected to do so again next month in its ongoing efforts to reduce inflation.

Tennessee Tech College of Business Dean Thomas Payne said it will have a big economic impact, but a necessary one. He said as rates increase, the price of goods will decrease.

“This is their way of attacking inflation and it will come at a cost,” Payne said. “And that cost is economic growth, economic activity, and of course higher costs for borrowing in the housing markets. So those are some of the concerns weighing not only on economists’ minds, but on the mind of those who have to manage a household budget.”

Payne said the consumers are starting to feel the pinch they see the impact on grocery bills, gas bills, and other finances. He said one of the biggest impacts has been on home mortgages. With the fed tightening and with the increase in rates, 30-year mortgage rates have doubled in the last year.

Payne said that these interest rate efforts come as a part of the federal reserve trying to play catch up after COVID. He said with so much fiscal stimulus over the last few years, the county got overextended on that side.

“We’ve driven up the demand for goods and services and as we’ve done that and as the federal reserve has accommodated that demand by keeping interest rates too low for too long, it has sparked inflation,” Payne said. “Now on the monetary policy side, they are contracting the money supply and driving up those rates and trying to put out that inflationary fire. Some of that is still going on the fiscal policy side, so it’ll be nice to get those two working together, drive down inflation, and get back to some pattern of normalcy.”

Payne said the fed’s target is two percent, and has been operating at eight percent. He said the federal reserve will continue to increase rates until they see a light at the end of the tunnel. At that point, they may slow the point of an interest rate increase.

At the same time, there will be more responsibility on the fiscal side of the government. Payne said eventually, the deficit spending will reduce and make the fed’s job a little easier.