The Federal Reserve left interest rates unchanged at its most recent meeting and is expected to cut rates just once this year.
Housing costs have remained high as the Federal Reserve has been raising interest rates, preventing many people from buying a home despite high mortgage rates. Some lawmakers, including Sens. Elizabeth Warren of Massachusetts and John Hickenlooper of Colorado, have urged the Fed to lower interest rates, citing the impact interest rates have on housing costs and auto insurance premiums.
Consumer prices rose 3.3% year over year, an unexpectedly low figure, but inflation is still too high for the Federal Reserve, which is moving cautiously. “The Fed is being very careful not to start cutting interest rates until it is confident that they are on track to achieve their 2% inflation goal,” said Robert Triest, a professor of economics at Northeastern University.
In March 2022, the Fed began raising interest rates after two years of near-zero interest rates in an effort to tame inflation.
Low interest rates make it easier for people to borrow money, but rising rates make it harder. During periods when interest rates were near zero, consumers benefited from lower interest rates on mortgages, credit cards, and auto loans.
Low interest rates also help spur hiring. If interest rates start to rise, that could have a negative impact on the job market. For example, rising interest rates could make it harder to borrow money to build an apartment building, said Tyler Schipper, an associate professor of economics at the University of St. Thomas.
“If the apartment buildings aren't being built, general contractors won't need to hire as many workers, and the manufacturers that make the metal parts that go into those buildings won't need as many workers,” Schipper said, adding that this would also affect real estate developers and construction workers.
Brian Bethune, a professor of economics at Boston University, said keeping interest rates high for long periods of time would hurt lower-income families who are most exposed to debt. “The longer we keep interest rates harshly high, the worse an already very unequal distribution of income and wealth is going to become,” he said.
But while many have benefited from low interest rates and some lament the era of “easy money,” economists say they hope the Fed never has to cut rates to zero again. One reason is that the next recession is “always around the corner,” meaning that with interest rates at zero, the Fed would have to use other policy tools to fight it, Schipper said. The U.S. experiences a recession on average every six to seven years.
“Moving to a more normal monetary policy will position us better to weather the next downturn,” Schipper said.
Triest said there would be no need to cut interest rates to zero again unless there was another severe recession or emergency.
Typically, job losses occur after interest rates rise, Triest said, but he added that the Fed's latest rate hike has helped the labor market be resilient, and while the unemployment rate is rising, it remains low at 4%.
Rising interest rates could hurt lower-income borrowers because they're more likely to be borrowers, but keeping interest rates artificially low could also hurt them in the long run, Schipper said.
Schipper said borrowing too much compared to what an economy can sustain can create financial bubbles that could lead to a housing crisis, for example. Low-income earners are the most vulnerable because they are at risk of foreclosure, he said.
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