(NewsNation) — Earlier this week, the Federal Reserve signaled it will likely continue raising interest rates to curb rising inflation, but what does that actually mean?
Almost 65% of Americans now say inflation is a bigger problem than COVID-19, unemployment or crime, according to a NewsNation/Decision Desk HQ poll released Monday.
Consumer prices jumped 8.3% last month when compared to 12 months earlier — remaining near 40-year highs and well above the 2% annual average rate that serves as the Federal Reserve’s goal.
Earlier this month, the Federal Reserve raised its benchmark interest rate by a half-percegoal.ntage point in an effort to curb the worst inflation the country has seen in 40 years. That decision marked the sharpest rate hike since 2000, and it’s likely more hikes are on the way.
According to minutes from meetings with Federal Reserve officials released Wednesday, more half-point hikes may be coming in June and July.
As of now, the federal funds rate is 0.75% to 1.00%, up from 0% to 0.25% in March 2020. Many economists expect that number could be as high as 3.5% by this time next year.
It’s part of the Fed’s effort to curb surging prices that are disproportionately hurting lower and middle class Americans.
So why would raising interest rates curb inflation?
When the Federal Reserve raises interest rates, it makes borrowing money more expensive. As money becomes more expensive to borrow, demand for homes, cars and other services should decrease in turn.
Typically, strong consumer spending is a sign of a healthy economy. But when demand significantly outpaces the supply of goods and services available, prices rise.
In a time of rampant inflation, the Fed can attempt to curb demand by raising interest rates. The hope is that doing so will “cool off” the economy and stabilize prices by re-balancing supply and demand.
But finding the right rate is a delicate balancing act — increase rates too fast and the Fed risks reducing demand too much, which could tip the country toward a recession. On the other hand, if rates remain too low, inflation may continue to increase.
The underlying causes of today’s inflation are the subject of significant debate. Some, including President Joe Biden, primarily blame factors brought on by the coronavirus pandemic and the war in Ukraine, arguing that labor shortages and supply chain disruptions are the main reason prices are up.
Others say the Federal Reserve’s own monetary policy overstimulated the economy, artificially propping up demand and contributing to the inflation we see today.
In an interview with Bloomberg TV on Monday, Nobel Prize-winning economist Joseph Stiglitz warned that raising federal interest rates alone would not solve the inflation problem.
“It’s not going to create more food. It’s going to make it more difficult because you won’t be able to make the investments,” Stiglitz said.
Instead, the Columbia University economist pointed to “supply-side” interventions such as expanding child care options so parents could return to the labor force.
“Trying to do everything we can globally to increase the supply is going to do more on dealing with the problem than causing a depression,” Stiglitz said.
It remains to be seen what affect raising interest rates will have on inflation. According to a new report Thursday, the U.S. economy shrank in the first three months of the year but consumer spending remained high.