Will they or won’t they? Speculation continues on whether or not the Fed will raise interest rates again at the Federal Open Market Committee (FOMC) meeting of September 19-20, 2023, after a 0.25% hike in July.
CME’s FedWatch Tool gives a roughly 33% chance that another rate hike will come in either September or November. Meanwhile, financial experts like YouTube personality Jaspreet Singh of Minority Mindset have discussed the possible impact of interest rate hikes.
He started by explaining the basic principle of supply and demand.
“For a number of years, we’ve been having a lot of demand in the economy. While the Federal Reserve can’t tell you not to go out and spend money… they can make borrowing money more expensive.”
When the Fed raises interest rates, he told viewers, it essentially raises the cost of borrowing money. Credit card debt becomes pricier, mortgages become more expensive, and buying a car with an auto loan becomes more expensive.
The Federal Reserve understands the implications of raising interest rates too much, too fast. “If you raise interest rates too much too fast, you can throw the economy into a recession. The Federal Reserve bank has recently come out and said they no longer believe we are going to enter a recession. They have said this publicly,” Singh told viewers.
However, the risk still exists. In fact, historically, out of 14 interest rate hike cycles, 11 ended in a recession. “Yes, you can see the economy grow when you see interest rates rise,” Singh said. “But that’s the exception, not the rule.”
Why does this happen? Singh explained the cycle using realtors and doctors as an example. When the cost of borrowing money increases, there will be fewer goods being transacted, and that means smaller profits for certain businesses.
“If people are making less money, people are buying less stuff,” he said. “If I’m a realtor and I go from making maybe $200,00 per year and now I’m making $70,000 per year, I have to adjust my lifestyle. Maybe I can’t buy as many vacations. Maybe I can’t buy as many clothes.”
Compounding this effect of reduced spending is the return of student loan payments. Singh shared an example of a friend of his, a doctor who was considering buying a new Tesla. But when his student loan payments of $1,100 per month returned, he opted, instead, to keep his older car.
“Our economy doesn’t run in a little vacuum, where the housing market doesn’t impact the car market,” Singh explained. “It runs in this big ecosystem where each piece of our economic system is impacting one another.”
Although the Fed has said they believe a recession can be avoided, Singh seemed skeptical. “Most times when you see interest rates rise, it causes a slowdown in the economy,” he said, “and we have seen interest rates rise very aggressively in the last 18 months.
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