(MUNCIE, Ind.) – The Federal Reserve interest rate hike Wednesday is its biggest since 1994. A Ball State economist expects the hike to cool down inflation, but not overnight.
The three-quarter-point rate hike doubles the short-term interest rate, with speculation it could double again by the end of the year. Economist Michael Hicks says the size of the rate hike simply brings the Fed to the same place it was expected to land more gradually — the Fed dialed back a rate increase in March after Russia’s invasion of Ukraine.
Interest rates are the Fed’s primary lever to bring prices down, and Hicks says it should drop inflation below two-and-a-half-percent, though it may take until next year. Higher loan costs for cars and houses should have an immediate effect on consumers’ buying decisions and push prices down. Hicks says while other items like gas and groceries aren’t directly responsive to interest rates, high prices have already affected buying habits, and the rise in interest rates will eventually spill over to those goods as well.
Reducing demand brings prices down, but at the likely cost of a short recession. Hicks says with jobs and wages up, it’s the right move at the right time. He says there’s no painless answer to inflation, and it’s better to absorb that pain now than next winter, when cold weather will drive heating oil costs up again.
But Hicks cautions Russia’s war in Ukraine played a big role in pushing prices up. He says other wild cards — further repercussions on gas prices from the war, supply chain snafus in China, another pandemic — could push them up again. He says the Fed has left itself plenty of room to adjust rates further to hit its target.