Main Street and Wall Street will parse comments made by Federal Reserve Chairman Jerome Powell on Wednesday for any indication that the central bank is worried about the economy’s potential to overheat.
“The Fed will reiterate its belief that increases in inflation will prove transitory,” said Greg McBride, chief financial analyst at Bankrate. “As economic growth rebounds with great strength, it will take longer for the labor market to return to pre-pandemic levels, and that’s what the Fed will focus on,” he predicted.
At the start of the pandemic, the Fed cut its benchmark interest rate to zero and launched an aggressive bond-buying program intended to keep money flowing in the economy. Powell and other Fed officials have said they don’t plan to withdraw or withdraw that support anytime soon, even though signs of inflation have started to show as the economy recovers.
“I think right now they’re focused on keeping the market calm and on month-to-month volatility,” said Lindsey Piegza, chief economist at Stifel.
As analysts analyze the Fed’s monetary policy, millions of Americans worry about something more fundamental: how much they’re paying to borrow money.
“I just retired last year to run my business full time, so yeah, I’m concerned about interest rates,” said Abbie Huckleby, 59, who lives outside of Houston and launched a plant-based meal prep service after a 31-year tenure with one of the area’s energy companies. Despite launching just before the pandemic hit, Huckleby said the business has thrived by catering to a newly housebound population. “The delivery business just took off,” she said. “People didn’t want to eat out of the house but still wanted to stay healthy.”
Although she would like to establish a physical storefront rather than rent space in a commercial kitchen, she fears those ambitions could be derailed if interest rates soar. Like many entrepreneurs, Huckleby relied on personal credit cards for start-up capital. Although she reduced that debt, she said she still owed about $18,000 and had to pay interest rates ranging from about 15% to 21%, she said.
“We really don’t need him to go much higher,” she said. “We’re betting on things that stay pretty much the same.”
Any significant increase in those APRs would force a major reassessment, Huckleby said. “We’ll have to guess whether my husband is going to retire or not, and then we might have to postpone getting a pitch,” she said.
Revolving debt like credit card balances, as well as short-term lending programs like auto financing, tend to react fairly quickly to a rise in the Fed’s benchmark rate. “When rates go down, they move much slower. But when rates go up, they go up much faster,” said Jeff Carbone, managing partner at Cornerstone Wealth Group.
Carbone predicted the Fed won’t change rates until late next year at the earliest; some experts think an even longer delay is likely. CME tool FedWatch puts the likelihood of any increase by the end of this year at a slim 10.5%.
Mortgage rates are more loosely correlated to the fed funds rate, although there is a connection. Mortgage rates are currently at near-record lows, although the average rate for a 30-year fixed mortgage is up about half a percentage point from its low at the start of the year.
McBride said mortgage rates aren’t the issue — yet. “Lack of homes available for sale and skyrocketing home prices are the hurdles for home buyers,” he said.
This supply crisis and soaring prices make these low rates a source of frustration for the many families for whom home ownership is still inaccessible.
“We’re looking forward to buying a house, but lately it’s been extremely difficult,” said San Francisco banking security supervisor Tommy Freeman. “You need to have two incomes, guaranteed, to survive in the Bay Area.”
Even with savings, good credit scores and a mortgage pre-approval from their credit union, Freeman, 31, said he and his wife found themselves repeatedly outbid by investor groups and speculators . “I feel like we’re competing against people we literally can’t compete with financially,” he said.
Freeman said he’s already resigned to spending more than $700,000, but in an area where Zillow data puts the price of a typical home at about double, the couple are wary of overstretching themselves. Stuck on the sidelines, he is frustrated to see his chance of getting an affordable mortgage rate dwindling. The only alternative, he said, might be to uproot his family of four and leave the state he and his wife have called home all their lives.
“At the end of the day, that’s why the idea of even leaving the state is being considered. Maybe Oregon or Colorado,” he said. “We continue to save and work, but over time the prices increase more and more.”