At the Federal Reserve’s September meeting on September 20-21, interest rates were raised by 0.75 percentage points. This is the fifth time the Federal Reserve has decided to raise interest rates this year, as the United States suffers from levels of inflation not seen since the 1970s. FSU experts discuss the implications that it could have on the economy.
In theory, a rise in interest rates should lower inflation levels. However, the latest rise in July had put a dent in the consumer price index (CPI), the measure economists use to gauge inflation levels. According to the Bureau of Labor Statistics, the CPI currently sits at 8.3%, significantly above the Federal Reserve’s 3% target. These record inflation rates mean students are paying more for things like gas, food, and consumer goods. Inflation, coupled with the already incredibly high price of education, is making it much more difficult for students to access basic necessities.
Financial pundits and economists agree that we shouldn’t panic that the Federal Reserve’s interest rate hikes haven’t affected inflation and that Federal Reserve actions won’t be felt for months. Dr. Randall Holcombe, DeVoe Moore Professor of Economics at FSU, said: “It takes a while for higher interest rates to have an effect on inflation. The interest rate hikes we saw starting in the summer won’t have much effect on inflation until 2023, but the Federal Reserve is pursuing the right policy to keep inflation under control.
Rising interest rates will lower inflation. Higher interest rates increase the cost of borrowing, which reduces consumer spending. Falling demand for goods and services lowers inflation. However, high interest rates come with some costs for consumers.
For example, higher interest rates mean a higher cost of borrowing. This leads to an increase in the cost of goods and services in all areas. Dr. Charles Barrilleaux, LeRoy Collins Professor of Political Science at Florida State, explained, “A rise in interest rates will increase the cost of borrowing, and that will affect most people. Students will see higher prices for groceries, rent, travel, and just about everything else. Already affected by the higher costs associated with inflation, rising interest rates can be crippling for some low-income students.
In addition, a rise in interest rates slows the economy. While this is good for fighting inflation, it risks sending the country into recession. Some economists already think we are in a recession, with two consecutive quarters of negative gross domestic product (GDP) growth. Holcombe explained: “Higher interest rates are an indicator of tight monetary policy, leading to higher unemployment. So far, the labor market has been remarkably resilient, so we can hope that the recession will not be too severe. Holcombe, like many economists, thinks a recession is inevitable. However, economists are now more worried about the severity of the recession than whether it will happen.
Dr. William Christiansen, director of FSU’s finance department as well as a Truist associate professor on campus also shares this fear of a recession. In an interview with FSView, Christiansen said: “Most forecasts have a recession probability above 50% and rising. It will be difficult with the Fed’s rate hikes to avoid a recession. A recession would hurt graduate students over the next year as companies seek to cut costs amid turbulent economic times. Finding a job would become more difficult as the labor market shrinks.
Despite these recession fears, Christiansen is optimistic. He cites falling energy prices as one of the positive developments in the fight against inflation. In fact, gas prices went from $4.82 in June to $3.43 this week. Despite these positive declines in energy prices, the fate of the economy remains uncertain.
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