Fed raises key rate and sees possible acceleration in hikes
The Federal Reserve took note of a resilient U.S. economy Wednesday by raising its benchmark interest rate for the second time this year and signaling that it may step up its pace of rate increases.
The Fed now foresees four rate hikes this year, up from the three it had previously forecast. The action means consumers and businesses will face higher loan rates over time.
The central bank raised its key short-term rate by a modest quarter-point to a still-low range of 1.75 percent to 2 percent. With the economy now nine years into an expansion, the move reflects the steadiness of growth, the job market’s strength, and inflation that’s finally reaching the Fed’s 2 percent target level.
Economists said the Fed left little doubt that it’s prepared to increase the pace of its credit tightening to guard against high inflation later on.
Cleveland-based economist George Zeller said the hike in interest rates could be bad for the Mahoning Valley economy, particularly in the context of the General Motors Lordstown Assembly Complex’s upcoming shift elimination and layoffs. The second shift there will end next Friday.
“It’s a little early to say where it’s going, but it’s not going to a good place,” he said of the interest-rate increase.
Zeller explained that higher interest rates mean consumers will see higher rates for auto loans.
“The trouble is, we have too many threats right now,” he said, noting both the situation with the plant and the U.S.’s recent trade disputes with allies such as Canada.
“There are going to be effects rolling into the Valley and everywhere else, too, from that,” Zeller said.
Analysts with Cox Automotive said higher rates already are impacting the auto industry.
“Buyers aren’t the only market participants [affected]. Manufacturers and dealers are also impacted by higher interest rates,” said Charlie Chesbrough, Cox Automotive senior economist.
He said the increase affects everyone from parts manufacturers to dealerships to suppliers.
“The automobile industry is cash intensive,” he said. “Rising interest rates impact all corners of the business.”
Cox Automotive Chief Economist Jonathan Smoke said the increases are “impacting borrowing and lending costs across the U.S. economy,” and automotive loan average rates are nearing a seven-year high.
“The 1 percent increase on the average auto loan we’ve already seen has increased the average monthly payment by $14,” he said. “Throw in higher vehicle prices, and average payments are up over 4 percent from last year. Higher rates are a problem for a consumer-driven economy as interest rates rise, debt service takes up a bigger chunk of income. Data on personal income and consumption through April indicate that U.S. consumers have seen a 12 percent increase in interest payments year over year.”