Interest rates

Do interest rates really control inflation?

Currently, the federal funds interest rate is essentially 0%, but they expect it to be 2.1% by the end of 2023.

They say this increase is designed to control inflation. So News 3 spoke to our financial expert Carl Carlson, CEO and Founder of Carlson Financialfor an analysis on the subject.

He said, “The Fed will probably raise interest rates to control inflation, but remember the Fed doesn’t control inflation; it has no guaranteed solution. The Fed is trying to control inflation.

Carlson added that the Fed could raise interest rates and said it was not controlling inflation, but was actually adding to it.

“If they could, wouldn’t they have done it already? They have things they try to do to help control it, but remember, it’s far from perfect science when it’s it’s about controlling inflation,” Carlson said.

Some of the negative effects that could be seen due to rising interest rates, according to Carlson, are:

  1. Increased rent payments, on top of current inflationary increases. Over two years, a 2% increase in interest rates and a 7% annual increase in inflation can take $1,500 in rent and add $282.00 per month to it.
  2. If you’re buying a new home or refinancing, a 2% increase in interest rates on a $200,000 mortgage will increase the monthly payment by $230.
  3. Car payments will increase.
  4. Credit card payments will increase.
  5. Interest rates on new student loans will increase.
  6. Most businesses borrow money and work with their suppliers who borrow money, so an increase in interest rates will increase business expenses that will be passed on to consumers.

While this could have a considerable amount of negative consequences, you may wonder, with the Fed Fund rate at record highs, doesn’t it make sense that it could be higher?

Carlson replies yes, “But it would be better to increase it more slowly so the impact can be much better controlled and minimized. It also doesn’t help that it’s been happening for 40 years of inflation.”

Related: What Causes Inflation and What Can We Expect?