Rate hike intended to bring down inflation, experts say
TAMPA, Fla. - The Federal Reserve's increase in interest rates this week marked the largest rate hike in 28 years, as the Central Bank tries to combat surging inflation.
Consumer prices are up 8.6% from a year ago. That inflation is making it more expensive to travel and eat, and there are still shortages of everything from workers to windows and baby formula.
"The bottom line is that there are too many dollars chasing too few goods," said Greg Ghodsi, Managing Director of Investments at Raymond James Financial.
Ghodsi says the Federal Reserve raised interest rates to reduce the amount of money in people’s pockets and bring inflation down.
MORE: Fed raises key interest rate in largest hike since 1994
"If we slow down the amount of spending that's going on, then the supply will start to increase. When the supply increases, you'll see prices begin to drop down," he said.
The interest rate controls the federal funds rate, which is the basic rate at which banks borrow and lend between each other. When that moves, so do the interest rates consumers pay.
"A lot of loans are tied to these various interest rates. And as they move higher, the loan rates that people will pay for mortgages, auto loans are all going to be moving higher, which has a significant impact on the economy," said Ghodsi.
That means most consumers will probably feel the impacts of the rate hike. Any loans that have an adjustable rate will likely become more expensive, credit card interest rates will rise, and hiring could slow down.
Experts say the higher borrowing costs should cause home sales to start falling, but it also makes Wall Street nervous which is why stocks have been unsettled lately.
"My biggest advice would be just to be very cautious in terms of making big decisions right now because of all this volatility," Ghodsi said.
It is expected the fed will continue to raise interest rates and reduce its balance sheet until prices get back under control.