This year’s interest rate hike has not affected all Americans equally. For the wealthy, they only slow down financial growth. However, for those without a significant financial cushion, rising rates impose an unsustainable burden. For millions of working Americans who are not wealthy and have little or no savings, high interest rates work like a regressive tax! Interest rates are now an unsustainable burden on Americans who have no choice but to try to survive the rising cost of living imposed by rising rates.
The sharp rise in rates has exceeded our nation’s ability to absorb such a jolt. After not raising rates at all in 2021, from March to September of this year, the Fed raised the federal funds rate by 300 basis points (3%). While financial institutions and millionaires can absorb this rapid and sharp rise, most Americans cannot.
Rate hikes have increased the cost of capital, increasing household expenses in multiple ways: homebuyers are out of the market; homeowners with adjustable rate mortgages face steep increases in their monthly payments; credit card debt spikes and cardholders face usurious interest rates; university loans have become more expensive; car loans have become more expensive; and consumers are forced to pay more for virtually everything, as the prices of the products and services they buy rise proportionally due to the increased operating costs of the businesses that supply them.
Rate hikes ripple through for a while, causing disruption and distortion as the economy adjusts to them. The effects of recent tariff increases continue to affect industrial supply chains and consumer demand. When they take full root, it will be evident that the finances and standard of living of low-income Americans have been disproportionately damaged. Although the Federal Reserve Board focuses on macroeconomic conditions and responses, it does not have the luxury of making decisions in a vacuum, ignoring the impact of its actions on those with less savings or living in margin.
For example, because of the racial wealth gap and implicit biases about credit risk, black homeowners face higher interest rates than their white counterparts, regardless of income level. resulting in a higher financial burden. According to the U.S. Department of Commerce’s Minority Business Development Agency, Black-owned businesses pay 1.4% more interest than white-owned businesses, and rate hikes exacerbate challenge to stay competitive . As the rate hikes aim to slow economic growth, they result in job losses, which disproportionately weigh on African Americans and Latinos/Hispanics, for whom unemployment rates are roughly double. of those of the white population even before the new job losses. People of color also have, on average, much lower levels of savings and investment due to historical and institutionalized barriers to generational wealth accumulation, leading to much greater fiscal hardship when rates rise only for their white counterparts who can tap into their accumulated savings and investments.
Our nation has faced unprecedented fiscal challenges since the onset of the COVID-19 pandemic in early 2020. These unique circumstances – the shutdown of the economy other than essential production and services, and the gradual recovery of industrial activity – have imposed daunting constraints on the re-engagement and revitalization of our nation’s full productive capacity. In 2020, it was necessary to resort to extraordinary measures in terms of interest rates, debt financing and the injection of liquidity by the Fed into the financial infrastructure of our country.
But the easing of financial policy and the maintenance of historically low interest rates have continued unabated throughout 2021 amid incipient signals of rising and accelerating inflation, as well as a robust growth in employment, manufacturing and productivity. It is now clear that a proactive approach by the Fed would have had a salutary effect by precipitating a soft landing for the economy to avoid an over-acceleration of inflation as a consequence of a revival of production capacity.
I am now very concerned that the opportunity to anticipate spectacular economic growth that was missed in 2021 could lead to overcompensation in 2022 based on risk aversion in the opposite direction of fiscal policy. It seems that Federal Reserve governors are collectively indebted to the idea that it is necessary to implement hyper-aggressive measures to prevent exposure to criticism for crafting an insufficient response to its earlier mistake. While it is humanly understandable that there is a strong tendency to avoid a recurrence of fatigue in response to unprecedented vicissitudes and economic fundamentals, overreaction has perilous and potentially long-term consequences that cannot be tolerated in light of the serious deleterious impacts they impose on the lives of individuals and family finances nationwide.
These concerns are shared by many of the most prestigious economists. On October 9, 2022, when Mohamed El-Erian, chief economic adviser at Allianz, was asked about the Fed’s rate hikes, he said: “She made two big mistakes…One is to wrongly qualify spike inflation…don’t worry about it. . And then mistake number two, when they finally recognized that inflation was persistent and high…they failed to take meaningful action. And as a result, we risk mistake number three, which is that by not releasing the accelerator foot last year, they brake hard this year, which would tip us into recession. So yes, unfortunately, this will go down as a big policy mistake on the part of the Federal Reserve. On October 10, El-Erian said, “Are they going to end up overdoing it? Probably yes. This is the most intense cycle of rising interest rates we have seen in decades. »
On October 18, 2022, KPMG Chief Economist Diane Swonk noted that mortgage rates had doubled and said, “The housing market is absolutely in a recession and collapsing. Rate hikes can amplify over time and they work with a lag. Much of the slowdown in consumer spending associated with the housing market meltdown is still ahead of us. People have started to slow down their purchases of major appliances and furniture, but not to the extent that we expect that to happen. The question is can (the Fed) really contain this increase once it starts to rise… My concern is that it should slow the pace of rate hikes to assess what is happening before waiting for the full effects. They kind of want to hit a higher rate which I think we need to hit…but there’s no need to rush now that we’re finally in what the Federal Reserve considers restrictive territory…Seems like a good time to slow the pace of increases.
While some interest rate hikes were necessary, the Fed must recognize the costs and consequences that have been imposed on American families as a result of the sharp and rapid rise in rates this year. Since Federal Reserve Chairs and Governors often insist that Fed decisions are data-driven and based on analysis of economic fundamentals, Fed calculations and decisions must absolutely take into account data on the ramifications that rates have on daily life and diminished purchasing power. middle-income Americans, and especially low-income Americans who have no way to adjust their household budgets to account for the impact of Fed rate decisions.
Given that the worst is yet to come with the interest rate hikes already imposed, any further rate hikes would have truly debilitating and tragic consequences. We must insist that the Federal Reserve not impose this inevitability on our fellow Americans, as it could endanger many lives and livelihoods.
Congresswoman Sheila Jackson Lee is a senior member of the U.S. House of Representatives Budget, Justice, and Homeland Security Committees.