The Atlantic Daily: The Fed Wants to Cool the Economy. What Does That Mean for You?

Here’s what might happen if interest rates are raised.

Stefani Reynolds / AFP / Getty
The Marriner S. Eccles Federal Reserve building is seen through chain link fencing in Washington, DC, on January 25, 2022.

The United States economy expanded more in 2021 than it had in any full year in decades, according to data released today by the Commerce Department. But the inflation rate also grew.

Concerns over rising prices helped prompt the Federal Reserve to indicate this fall that it would incrementally raise interest rates in 2022, in an attempt to slow the economy. Yesterday, Chair Jerome Powell signaled that it’s on track to make its first hike in March.

So what does all that mean, and how might Americans feel the effects of higher interest rates in their everyday lives? I asked a few experts.

Higher interest rates make it more expensive to borrow money.

The Fed lowered rates in 2020 to try to stave off the pandemic recession. As Angela Vossmeyer, an associate economics professor at Claremont McKenna College, explained to me over email, “Low interest rates incentivize consumption.”

Now that the economy has turned around and inflation is mounting, the Fed wants to slow things down a bit.

The official Fed interest rate influences interest rates throughout the economy, including the rates at which banks are willing to lend consumers money. So if you’re looking to buy a house later this year your mortgage rate might be higher.

In general, “individuals seeking bank loans or lines of credit to purchase a car, remodel their home, expand their business, or even purchase retail items with credit cards will see monthly interest payments higher than what we have seen in the last two years,” Vossmeyer said.

“On the other hand,” she pointed out, “with interest rates going up, Americans will have safe and meaningful outlets for saving again.”

The housing market—which has been wild—may be tamed as the cost of mortgages go up. And if inflation slows or reverses, as intended, purchasing power will increase.

But that doesn’t mean the Fed’s move is an economic cure-all.

“We often treat the Federal Reserve like the Wizard of Oz, but it’s not as powerful as some people think,” my colleague Derek Thompson told me this afternoon. “It has no easy button to press that will automatically reduce American spending on all durable goods or relieve supply-chain snarls, which are the driving forces of inflation.”

“The Fed is powerful, but the forces of national and global economics are much, much more powerful,” Derek said.

A black and white portrait of Stephen Breyer, visible from the shoulders up.
Jewel Samad / AFP / Getty

The rest of the news in three sentences:

(1) President Joe Biden officially announced the retirement of Justice Stephen Breyer and said he would nominate a replacement before the end of February.

(2) The Coast Guard is ending its search for the dozens still missing after a boat capsized off the Florida coast.

(3) Gas stoves are even worse for climate change than previously thought, a new study found.

Today’s Atlantic-approved activity:

Get excited for the year in movies: Fresh off the Sundance Film Festival, our Culture writers Shirley Li and David Sims highlight 16 indie movies to look out for in 2022.

A break from the news:

Can medieval sleeping habits fix America’s insomnia?