Fed’s Interest rate impact

 

Fed’s Interest rate impact, The Federal Reserve’s recent series of interest rate
hikes have delivered a substantial increase in the cost of living for more than a few Americans.
That’s at odds with the institution’s stated goals.

 

Topics

The Impact of the Consumer Price Index
The CPI: Incomplete
The Pros and Cons of Inflation

 

 

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The Impact of the Consumer Price Index

 

Fed’s Interest rate impact is tasked with maintaining price stability,

promoting maximum employment, and fostering financial conditions that facilitate economic growth.
But its recent actions seem to be working against those objectives,

by raising rates, the Fed has made it more expensive for consumers to borrow money and

has put upward pressure on prices across the economy.

That may be good news for savers and investors,

but it’s bad news for everyone else who is struggling to make ends meet in an already difficult economic environment.”

 

The Consumer Price Index (CPI) is the most widely used measure of inflation in the United States.

The CPI measures the average change in prices paid by consumers for a basket of goods and services.

The shelter, or cost of housing, component of inflation used in the CPI doesn’t include information on homebuyers who have borrowed using adjustable-rate mortgages (ARM.)

That means anyone who took out an ARM will more than likely have seen a jump in their monthly cost of living.

In other words, inflation is higher for this group.

 

There are two main reasons why this is so important to understand.

First, it helps explain why some people feel like they are not seeing wage gains even though overall prices are rising.

And second, it has implications for monetary policy since the Fed uses CPI as one input when making decisions about interest rates.

 

The first reason this is important to understand

has to do with how people experience inflation differently based on their circumstances.

If you own your home outright or have a fixed-rate mortgage,

then your monthly shelter costs aren’t going up very much right now because actual rents and

home prices aren’t increasing very rapidly nationwide relative to historical norms.

 

But if you took out an ARM back when housing was booming and

interest rates were low,  your monthly payments could be rising quite quickly right now as adjustable rates reset higher based on prevailing market conditions”

Some people mistakenly believe that the CPI is inflation.

It isn’t. It is a measure of inflation, and like all metrics it is flawed.

There is no way it can accurately reflect the situation for every

Americans including a substantial group of people who borrow using ARMs.

 

 

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The CPI: Incomplete

 

The CPI does not include important factors such as housing costs or healthcare costs,

which have been rising faster than general inflation for many years.

In addition, the CPI does not take into account changes in the quality or quantity of goods

and services purchased.

For example, if the price of steak rises but you purchase chicken instead because it’s cheaper,

the CPI would show no change in your cost of living even though you are clearly spending less on food overall.

 

The most important thing to remember about any metric is that it can only give you a snapshot in time

and cannot possibly reflect all aspects of reality.

The best we can do is use multiple measures to get a more complete picture An adjustable-rate mortgage,

or ARM, is a type of home loan where the interest rate is not fixed for the entire life of the loan.

The initial interest rate is often lower than that of a traditional 30-year fixed mortgage,

making it an attractive option for borrowers looking to save money in the short term.

However, after a set period (usually 3-5 years), the interest rate on an ARM can increase significantly,

which could make monthly payments unaffordable for some borrowers.

It’s important to understand

how ARMs work before signing up for one,

the Federal Reserve recently raised interest rates for the fourth time in 2018.

This has caused some concern among traders and

investors about inflationary pressures in the economy.

There are a few key points to consider when thinking about this issue.

 

 

 

The Pros and Cons of Inflation

 

First, it is important to remember that not all inflation is bad.

A certain level of inflation is necessary for healthy economic growth.

It encourages spending and investment, which drives economic activity.

Too much inflation can be damaging, but a little bit of inflation is actually good for the economy.

Second, it is worth noting that the Fed’s main goal is not to control inflation;
rather, its primary mandate is to promote maximum employment and stable prices.

In other words, the Fed cares more about keeping unemployment low than it does about keeping prices from rising too quickly.

So, while higher interest rates may lead to higher prices in some areas of the economy (such as housing),

overall, they are still likely to help boost economic activity by making borrowing cheaper
and encouraging spending and investment may not be suitable for everyone.

 

 

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