Currently, the Fed Funds interest rate is basically 0%, but they are forecasting it to be 2.1% by the end of 2023.
They say this increase is designed to control inflation. So, News 3 spoke with our financial expert Carl Carlson, CEO & founder of Carlson Financial, for some analysis on the topic.
He said, "The Fed will likely raise interest rates to control inflation, but remember that the Fed does not control inflation; they do not have a guaranteed solution. The Fed tries to control inflation."
Carlson added that the Fed could raise interest rates and says it doesn’t control inflation but actually adds to it.
"If they could, wouldn’t they have done it already? They have things they try to do to help control it, but remember, it is nowhere near a perfect science when it comes to controlling inflation," Carlson said.
Some of the negative effects that might be seen due to increasing interest rates, according to Carlson, are:
- Increase in rent payments, in addition to current inflationary increases. Over two years, a 2% increase in interest rates and a 7% annual inflationary increase can take a $1,500 rent payment and add $282.00 a month to it.
- If you are buying a new home or refinance, a 2% increase in interest rates on a $200,000 mortgage will increase the monthly payment by $230.
- Car payments will increase.
- Credit card payments will increase.
- Interest rates on new student loans will increase.
- Most business borrow money and work with their vendors who borrow money, so an increase in interest rates will increase business expenses which will be passed on the consumers.
While this could have a considerable amount of negative consequences, you may ask, with the Fed Fund rate at record lows, doesn’t it make sense that it could be higher?
Carlson answers yes, "But it would be better to increase it more slowly so the impact could be much better controlled and minimized. It also doesn’t help that it is happening during a 40-year high in inflation."