As fears and frustrations about inflation continue to mount in Charlotte and around the country, the Federal Reserve announced a significant hike in interest rates in an attempt to get control of the problem.
The move could help drive down the prices of everything from houses and cars to, eventually, more everyday goods such as gas and groceries, North Carolina economists say. The catch, they caution, is that it could also trigger a recession, which would mean potential job losses in the community.
Here’s what to know about where interest rates stand and what that means for inflation and the local economy:
What happened with interest rates?
The Federal Reserve announced it’s raising the benchmark short-term interest rate — a rate that affects consumer and business loans — by three-quarters of a point.
It’s the biggest rate increase since 1994, and rates may be increased again later this summer, Fed Chair Jay Powell said.
“We thought strong action was warranted at this meeting,” he said, “and we delivered that.”
The move is intended to address an inflation rate that reached a four-decade high last month.
How does raising interest rates help inflation?
Raising interest rates may actually drive up the prices of some things, economist Connel Fullenkamp, a professor at Duke University who specializes in the development and regulation of financial markets, explained. But that can ultimately help stem the tide of inflation.
“Interest rates on car loans and mortgages and credit cards all go up, and so when people go to borrow and buy something like a car or home or a new appliance, they look and say, ‘gosh, the interest rate charges are so high, I’m not gonna buy it anymore.’ … That decreases the amount of demand for goods and services in the economy. And that’s really what cools the economy, and then it brings inflation down,” he said.
When will gas prices, cost of household goods go down?
It can take time for the impacts of higher interest rates to “percolate through the economy” and help lower the prices of everyday goods and services, such as gas and groceries, Fullenkamp added.
“Most economists think it takes up to a year-and-a-half to two years for monetary policy action to take full effect,” he said. “So the bad news is, we’re not going to see the full effect of these rate increases on inflation for a while.”
Fullenkamp added that the Federal Reserve will likely raise interest rates again, an indication they think “it’s going to take a while for them to get inflation under control.”
“I don’t really think that we’re going to see immediate relief in prices. The best that we can hope for really is that inflation is peaking and will hopefully start to gradually fall this summer,” he said. “But even that’s a question.”
UNC Charlotte economics professor John Connaughton, who leads the school’s quarterly North Carolina Economic Forecast, said he has already observed some shifts on the inflation front, but not because of interest rates.
“We’re starting to see a number of retailers’ inventories rising as consumers shift this summer from buying goods to buying more personalized services and vacations,” he said. “And so, eventually, if inventories build up because people weren’t buying as much, how do (businesses) get rid of (excess)? They lower prices. They have a sale, and that should help reduce inflation.”
Are we at risk of a recession?
Some have expressed concern about the stock market dipping into a “bear market” — when there’s a steep drop-off in the stock market — amid the Federal Reserve’s news, but Fullenkamp cautioned against getting worked up about that.
“The stock market is a classic case of overreaction,” he said. “The stock market always overreacts to news like this.”
A real potential downside of the Federal Reserve’s attempts to drive down inflation, both Fullenkamp and Connaughton said, is that the demand for goods and services could fall so much that companies lay off workers, triggering a recession.
“That is an incredibly hard challenge, especially because (the Federal Reserve) let, in my opinion, inflation go too high for too long, which means that they have to really raise interest rates even more than they would have had they started last year,” Fullenkamp said. “And so it reduces the chance that they’re going to be able to achieve this so-called ‘soft landing’ where they slow the economy’s growth rate down so the economy doesn’t grow as fast but it doesn’t go into recession.”
Connaughton offered a similar assessment.
“As time has gone on and inflation has become more entrenched in the psyche, if you will, of both businesses and consumers, the harder it is to get interest rates to change behavior and engineer this ‘soft-landing,’” he said.
Whether a recession is a definite remains to be seen though, he added, and it will take time to know for sure.
“Right now, if you talk to most economists, they’re sort of on the fence on this — it’s about a 50/50 call. Half the economists will suggest the recession is coming, and the other half will say, ‘no, it’s not certain yet,’” he said. “The smart money is that if in fact it does occur, it’s probably very, very late this year, more than likely 2023.”
What would a recession mean for Charlotte, North Carolina economies?
Another major question economists are grappling with is how “deep” a potential recession would be, Fullenkamp said.
“Right now we’re thinking about a very strong economy … People are still out spending money. The job market is still pretty hot. There’s still lots of opportunities there ... And so if there is a recession, which I think will probably take place either very late this year or early next year, there’s a good chance that it’s going to be a fairly mild recession,” he said.
North Carolina’s economy is generally “in really good shape,” he added, but that doesn’t mean the state wouldn’t feel the effects of a recession.
“That doesn’t mean that the jobs are going to be there for everybody,” he said. “Most of the companies that are coming to North Carolina are (bringing) high-skilled, high-paying jobs, which is great, but that doesn’t necessarily help the folks who are most likely to lose their jobs in a recession, who tend to be in low-skilled, low-wage jobs.”
Connaughton said he believes the impacts of a potential recession on Charlotte’s economy and the state as a whole “will depend on what form the national recession takes.”
“With the exception of the ‘Great Recession’ in 2008 and 2009, Charlotte has been relatively unaffected by recessions in the past,” he said, noting that recession was a “financial recession” that heavily impacted the banking industry, a major part of Charlotte’s economy.
“This one is not going to be like that,” he said. “There’s going to be a truly old-fashioned inventory type of recession, where consumer demand drops off, businesses find they’ve got too much inventory and they start to have to cut back on employment.”
The Associated Press contributed to the reporting of this story.