Jerome Powell believes high inflation is temporary – how are interest rates affected?

Federal Reserve Chair Jerome Powell says rising inflation is temporary. Here’s what that means for interest rates.  (iStock)

Federal Reserve Chair Jerome Powell said in his testimony to Congress on July 15 that rising inflation is temporary, amid growing concerns that the economy is overheating.

“Inflation has increased notably and will likely remain elevated in coming months before moderating. Inflation is being temporarily boosted by base effects, as the sharp pandemic-related price declines from last spring drop out of the 12-month calculation,” Powell said. “In addition, strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind.

“Prices for services that were hard hit by the pandemic have also jumped in recent months as demand for these services has surged with the reopening of the economy,” he continued.

With the view that inflation is temporary, the Federal Reserve could keep the federal funds rate low for now, which in turn would keep interest rates low. If you’re interested in taking out a personal loan, now could be a good time since interest rates are at all-time lows. Visit Credible to explore your personal loan options.

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How does inflation affect interest rates?

The inflation rate indirectly affects interest rates through monetary policy set forth by the Federal Reserve through its Federal Open Markets Committee (FOMC) meetings. The Federal Reserve seeks to keep interest rates at a level that will sustain inflation at 2%. If inflation gets too high, the Fed will raise interest rates in order to spur economic activities, such as lending or spending. 

Currently, consumer prices are rising at an annual inflation rate of 5.4%, according to the June Consumer Price Index (CPI) from the U.S. Bureau of Labor Statistics (BLS). Common causes of inflation include price pressures from an increase in demand, supply shortages and in this case, a rapid recovery from the COVID-19 pandemic.

While prices rise well above the 2% level the Fed looks for, Powell explained that the FOMC is more focused on long-term inflation and how this increase plays out over a longer period of time rather than current inflation data levels. 

“To avoid sustained periods of unusually low or high inflation, the Federal Open Market Committee’s (FOMC) monetary policy framework seeks longer-term inflation expectations that are well anchored at 2%, the Committee’s longer-run inflation objective,” Powell said. “Measures of longer-term inflation expectations have moved up from their pandemic lows and are in a range that is broadly consistent with the FOMC’s longer-run inflation goal.”

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Powell explained that the Fed wants to see inflation above 2% for some time before it will raise interest rates. 

With rates at all-time lows, consumers have more time to take advantage of the low rate environment and save money. Private student loan borrowers, for example, can save significantly on their monthly payments by refinancing. Visit Credible to compare multiple lenders at once and find the one that best fits you. 

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Is now a good time to refinance?

Interest rates are low, and despite rising inflation, the Federal Reserve plans on keeping them that way. But as economic growth improves, raising interest rates will become necessary. Economists and even some Fed presidents are currently predicting that an interest rate hike could be necessary as early as next year. And mortgage interest rates could go up sooner —  Fannie Mae forecasted the 30-year fixed-rate mortgage will increase to 3.1% by the end of this year. 

Besides today’s low rates, mortgage refinances can also benefit from the Biden administration’s removal of the adverse market refinance fee. With this fee gone, it makes it even more beneficial for homeowners to refinance their mortgage since they could save about $1,400 in fees. 

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With interest rates at all-time lows, Americans could save money on new loans or by refinancing their current ones. If you’re interested in refinancing your mortgage but have questions, visit Credible to talk to a home loan expert and see how much you could save on your monthly payments. 

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Have a finance-related question, but don’t know who to ask? Email The Credible Money Expert at moneyexpert@credible.com and your question might be answered by Credible in our Money Expert column.

View more information: https://www.foxbusiness.com/personal-finance/jerome-powell-fed-chair-high-inflation-interest-rates

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