The rise will affect auto loans, credit cards, mortgages and jobs

  • Higher-than-expected inflation in August means the Fed is likely to support a massive rate hike next week.
  • The increase in interest rates has already increased the prices of mortgages, auto loans, and credit cards for Americans.
  • Markets are now anticipating even bigger hikes in 2023, leaving households bracing for more economic pain.

Since the beginning of 2022, it has become more and more expensive to get a mortgage, take out credit card debt, or take out a loan of any kind.

The new data suggests that the increase is just beginning – and could add more pain in the form of job cuts and smaller increases.

The Fed’s inflation battle hit a crossroads when the Consumer Price Index was updated on Tuesday. Had inflation calmed more than expected in August, the central bank may have eased interest rate increases and perhaps averted the economy stagnation of growth.

This did not happen. Inflation slowed, but barely. annual rate fell to 8.3% from 8.5%But prices rose 0.1% during August alone, accelerating after holding steady in the previous month. Fed officials have made it clear that they will not hold back on raising interest rates until they see it.”Conclusive evidence“This inflation is slowing. The August report is nowhere near matching that description.

Ian Shepherdson, chief economist at Pantheon Macro Economics, said there was “no chance now” that the Fed would slow its schedule and raise interest rates by only half a percentage point. Markets, economists and analysts see another rise of 0.75 pips – the third in a row – as a sure thing.

Interest rates are the Fed’s best tool to slow the rate of price growth. Higher borrowing costs tend to slow economic growth, as Americans rein in their spending and companies slow their expansion plans. Demand falls, supply catches up, and pressures easily push prices higher.

Higher rates put more pressure on the labor market. Companies tend to reduce their hiring plans and issue smaller raises when it is more expensive to borrow. Weak demand can lead to a significant drop in revenue and prompt companies to cut jobs altogether.

Not only did Tuesday’s inflation data change the calculus of the Federal Reserve’s September meeting. Economists are now preparing for a more aggressive walking cycle through the rest of the year, complete with more high-volume hikes and few signs of slowing.

For the average American, that would mean expensive loans, smaller payouts, and an increased risk of losing a job.

Fed rate hike plans are getting stronger

In just one week, bets on how the Federal Reserve will raise interest rates have swung much higher. Traders are now anticipating a more violent walking cycle through the end of 2022.

The market situation last week indicated a 76% probability of a 0.5 point rise, according to data from CME مجموعة group. A slim majority now sees officials raise rates another 0.75 basis points in November to a range of 3.75% to 4%.

Market bets are that the Fed will not stop there. CME data pegs the odds of a half-point rise in December at 40%. A week ago, options positions indicated a 75% probability that prices would rise by just a quarter of a point at that meeting.

In short, investors are now heading for two more increases of 0.75 point and 0.5 point increase to close out the year. That would leave rates half a percentage point higher by the end of 2022 than projected just a week ago. After weeks of hawkish language from Fed officials and a disappointing inflation report, the market appears to be finally heading towards the central bank’s “go big or go home” expectations.

“The Fed has made it clear that it will not risk any opportunity, even if it increases the risk of excessive tightening,” Shepherdson said at the Pantheon.

This tightening is already affecting the finances of Americans. Mortgage rates rose last week to Highest level since 2008, further eroding the affordability of homes in an already tense housing market. Credit card rates rose sharply Until 2022, interest payments have increased for those with huge debts. And since it usually takes about a year for a price hike to be fully felt throughout the economy, these tightening effects are set to become more severe.

Fed officials have also made clear that they want to avoid the biggest risks that come with monetary tightening. Powell warned in August that calming inflation by raising interest rates significantly would “It brings some pain“For families and businesses in the form of a less advantageous labor market and more expensive loans. The inconvenience is likely to remain worth it in the long run,”

“These are the unfortunate costs of lowering inflation, but failure to restore price stability will mean much more pain,” Powell added.