From groceries to loans, here’s how the federal interest rate hike affects SC residents
The Federal Reserve increased interest rates for the first time since 2018 on Wednesday, meaning possibly reduced inflation, but also a weakened ability to borrow money for South Carolina residents and businesses.
The U.S. central bank raised interest rates by 0.25%, as previously expected, to reduce the rapid inflation underway in recent months. Doing so could also make it harder to get loans or lower mortgage rates, some economic experts say.
“It’s a trade-off,” said Joey Von Nessen, research economist at the Darla Moore School of Business at the University of South Carolina. “But we’re not talking about a significant increase … this is the lowest they can raise the interest rates by.”
The current inflation rate is 7.9%, the highest it’s been in 40 years.
“What that means for South Carolina residents is what cost $100 in 2021 costs $108 today,” Von Nessen said.
The Fed’s decision to raise interest rates had been long expected and the policy-setting Federal Open Market Committee projects the central bank will likely increase them up to six more times this year.
“The goal is to taper demand,” Von Nessen said. “Only by tapering demand can we lower inflation and this is the first step in trying to combat it.”
Lowering demand should eventually lead to price stabilization for consumer goods. However, raising interest rates means the cost of borrowing will rise, which would make it harder for South Carolina residents to get a bank loan or business loan, for instance.
“We’re likely to see a slow rise in borrowing costs in 2022,” Von Nessen said.
The high inflation can be attributed to a host of factors — from the release of pent up demand following COVID-19 pandemic shutdowns, to an influx of economic stimulus, tax credits and higher unemployment benefits in 2020 and 2021, which allowed people to spend more.
Von Nessen said that typically, when the Fed sees inflation rise more than it should, the central bank raises interest rates before it starts to get too high.
“They waited longer this time because they were worried raising rates too early would derail the economic recovery after COVID,” Von Nessen said. “They were also concerned about COVID variants in 2021.”
Von Nessen noted that while the Fed’s actions should help get prices under control, don’t expect big drops in costs anytime soon.
“We’ll likely start to see inflation go down later this year in the summer and fall … this will be a months-long process, not a matter of weeks,” he said “Prices will continue to rise, just not as fast as they have been. Some inflation is desirable for a normal, healthy economy.”
This story was originally published March 17, 2022 at 9:20 AM.
