Fed rate hike: Who wins and who loses from Fed monetary policy | Univision money news

It works like this: the price of money is raised to stop the price of things. In other words, by raising the reference rate, everything related to interest (credit cards, commodity loans, mortgages, etc.) becomes more expensive, consumer spending slows, demand is contained and they must stop increasing prices.

The Fed seeks to do this with a “soft landing”. The problem is that it seems increasingly obvious that it will have to apply the brakes and will not be able to avoid the frightening effect of stagnation.

This is what economists agree on Jerome Powellthe head of the Federal Reserve, has been slow to say how deep the inflation risk (which he initially considered temporary) is.

But worse-than-expected CPI data in May prompted Powell to announce on Wednesday Biggest price hike since 1994. We are not trying to create a recession. Let’s make that clear,” Powell said in his appearance on Wednesday.

Who are the losers to raise interest rates?

1. Their first home buyer

The bad news is piling up for those looking to buy their first home. Inflation has been particularly high in the real estate market in many areas of the country, which is why we must now add the increase in mortgage interest to historical levels.

Although the interest on mortgages does not depend so much on the reference rate administered by the Fed as on the interest on 10-year Treasuries, they are related to each other.

The 10-year Treasuries started in 2022 at 1.5%, where they were installed months ago, and in April it reached 2.3% and is already at 3.4%. According to Freddie Mac, the Federal Mortgage Corporation, this week’s 30-year fixed-rate mortgage saw its biggest rise in more than three decades, rising 0.55 points and going from 5.23% to 5.78%.

two. Investors in the stock market

Since hitting in March 2020 at the height of the pandemic, the S&P 500, one of the benchmarks for the New York Stock Exchange, has seen increases of nearly 120% in 21 months. Gains could be up to 50% compared to pre-pandemic levels.

But 2022 has started with declines and the stock market is already at the levels of the beginning of 2021. In fact, it has accumulated more than 20% losses so far this year and entered what they call a “bear market”.

Economists point out that they are affected by the rise in money prices Those who have debt with variable interest. And nobody owes more than the federal government, which is in the red with more than $30 trillion.

The government has been profiting for years from the fact that interest rates are close to zero made it perfectly reasonable to borrow to invest in the growth of the economy.

But the increases in reference interest rates were indirectly reflected in an increase in what the federal government pays to finance itself through the issuance of public debt.

In June of last year, the federal government paid 1.5% and 2% for 10- and 30-year Treasuries. The escalation in recent months, since the Fed began raising interest rates, has put them at 3.3 and 3.4%, respectively. Of course, it is still well below inflation (8.6%).

In the short term at least, we are all likely to be affected in a negative way.

Cada subida de la tasa de interés encarece el coste de los préstamos para los consumidores y las empresas, con la consecuente caída del gasto y de la confianza de los consumidores, lo que a su vez puede afectar negativamente la empleo generally.

he is called, Ridiculous increases in interest rates are a recipe for killing economic growth. Economists talk about a recession with two consecutive quarters of negative growth: we already have one, and the second is yet to come.

Who are the winners of the price hike?

1. Those with cash savings (a lot of savings)

If raising rates is nothing more than increasing the price of money, then the first beneficiaries will obviously be those who have the money in cash.

During all these years of controlled inflation and near-zero interest rates, keeping savings in the bank was in principle a bad business, but that is the case for many, at least for those who maintain the healthy habit of owning a fund in case of an emergency or you Save down payment on a home, car, or other large purchase.

And it was bad business because the banks offered little to keep the money. Now, with rising prices, it is expected that financial products with better returns will start appearing, especially savings accounts. OnlineGenerally more aggressive.

Although this increase would hardly equal the 0.75 point the Fed raised to the reference rate, because the interest offered by banks depends on many factors (including how much is kept in the account and what the competition offers).

two. All others, but in the medium term probably not

As Powell said, the Fed seeks to harness inflation by avoiding a recession (which economists are pessimistic about), and maintaining unemployment (at 3.6%, according to the latest Labor Department report).

Powell insists that a “soft landing” without a recession is possible. “There is a path that can take us there,” he said on Wednesday. “It’s not getting easy, it’s becoming more and more challenging,” he admitted.

Thus, the Fed expects to weather this storm and end the year with 1.7% growth (well below the 2.8% forecast in March) with an unemployment rate of 3.7% (at 3.6%).

If it happened with 2% inflation, we would have all won over the medium term.

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