Consumers hit with higher prices due to inflation likely aren’t looking forward to interest rate hikes from the Federal Reserve. Why rate increases make sense.
The Federal Reserve has a few main goals it focuses on in the economy: to promote maximum employment, keep prices stable and have moderate long-term interest rates.
That rate influences everything from interest on credit cards to mortgages and car loans, making borrowing more expensive. On the flip side, it also boosts rates on high-yield savings accounts.But how do higher interest rates reel in inflation? By slowing down the economy. There could also be a secondary effect of alleviating supply chain issues, one of the main reasons that prices are spiking right now, said McBride. Still, the Fed can't directly influence or solve supply chain problems, he said.
Markets are pricing in a 50 basis point, or 0.5%, rate increase in March, but have not reached any consensus on further rises. Last week, he said in an interview with Bloomberg News that he thinks the Fed should raise rates by as much as 1 full percentage point by July. Other regional bank leaders have expressed the desire to increase rates beginning in March, but none are as hawkish as Bullard.