How will the Fed’s interest rate hike affect costs, the midterms?

0:00It's Consider This, where every day we go deep on one big news story. Today, borrowing money is about to become a little bit more expensive. Three years. That is how long it has been since the Federal Reserve raised interest rates. And on Wednesday, the Fed announced a quarter percentage point hike to help calm stubborn inflation fueled by high energy prices. And the Fed signaled another hike may come later this year. While that number may seem small, it can mean big costs. Credit card rates are going to go up. Rates on home equity lines of credit are going to go up. Mark Zandy, chief economist, Moody's Analytics, he spoke to Morning Edition Wednesday morning.

0:43If you're a small business person or midsize company that borrows from a bank, you know, your borrowing costs are going to go up, going to make it more difficult for you to go out and hire and to invest. We could see pressure on the stock market, which could reverberate back on the economy. So there's lots of different ways these higher rates are going to affect all of us. And with prices climbing faster than average wages, workers' paychecks are not stretching as far as they used to. Consider this. The Federal Reserve is making it more expensive for people to carry debt at a time when costs are already high.

1:14How might that affect people's pocketbooks and the midterms?

1:27From NPR, I'm Mary Louise Kelly. On the latest Code Switch, 25 years after 9-11, Americans have gotten real used to being watched by the government, from doorbell cameras to AI-powered license plate readers. If you put anyone under a microscope or any community under a microscope, you're going to find reasons to harass people or to ticket them or to arrest them. Listen to Code Switch in the NPR app or wherever you get your podcasts.

2:01It's Consider This from NPR. The Federal Reserve voted to raise its benchmark interest rate for the first time in three years. Board Chairman Kevin Warsh said at today's press conference they are raising rates to tamp down on more than five years of inflation. The plain fact is that inflation is too high and has been for too long. So what does this mean for your wallet? Here to break it down, our NPR personal finance reporter, Stephen Basaha, and NPR senior national political correspondent, Maura Liason. Hi, you two. Hi there. Hi. So a rate hike, it's a quarter percentage point. That does not sound like a huge amount.

2:41Stephen, kick us off. What will this mean for all of us, for consumers? Yeah. Near term, it means the cost of borrowing is about to get a little more expensive. That includes mortgages, which they're not directly connected to interest rates, but they are influenced by them. your standard mortgage has been climbing close to 7%. And this could push us past that point sooner rather than later. The more direct connection is with your credit card. So any new debt you put on that credit card, you'll likely have to pay more interest on that debt. And any current debt that you already have, you'll have to pay more interest on that too.

3:15More interest. How much more? Honestly, it's not a lot more. I was talking with one of the finance experts at LendingTree about this and was told, you know, today's rate hike is not going to rock anyone's financial world. Like by their math, if you have about$7 ,000 in credit card debt, this rate hike will mean paying only a few bucks more each month. Remember that the Fed today, they only raise interest rates by a quarter of a percentage point. They also projected another similar rate hike this year, though that depends on how the economy is looking. These are all fairly modest moves, and on their own, it shouldn't cause much harm to people's finances.

3:51Maura, fairly modest moves, Stephen just said, but politically, high costs are not fairly modest at all. No, they are the number one issue for voters. Voters tell us in every poll and every focus group that the cost of living is their number one concern. You can't eat GDP. And for a very long time, we had this long, stable period of low interest rates and low inflation, but not recently. And the economy and voters' fears for their futures, for their kids' futures, are having a real impact on how they're thinking. We know from the past that inflation defeats presidents, defeats incumbents. That's why President Trump has been asking the Fed to cut rates for a year.

4:32That's obviously not what happened today. No, indeed not. Stephen, just to make the basic point, prices are high. They've been high. Consumers are stressed out and have been stressed out about high costs. How does raising interest rates, something that, as you just explained, would actually make quite a few things more expensive, fit in? Yeah, it does seem counterintuitive, right? You know, the Fed's ultimate goal here is reining in inflation. And this is going to raise some costs for consumers, even if it is pretty modest. The thing is, though, even with how stressed consumers are about costs right now, they are still spending.

5:09Like this morning, we got retail sales numbers for August and they grew at 1.2 percent from a month earlier. So consumer spending not slowing down. And neither is commercial spending, especially, you know, with the AI boom leading to this like data center construction wave across the country. So raising interest rates, it is about just tapping the brakes on the economy. Ideally to raise borrowing costs, not enough to like tank that spending, but just slow it down a little bit. So from the Fed's perspective, this is a little short-term pain, some like maybe light whiplash from tapping those brakes.

5:43And it is worth it if it means lessening the pain from inflation in the long term. Well, the long term is not what politicians in Washington are thinking about right now. Short-term pain is what they're worried about. And the Republicans' ability to hold on to control in Washington is based on near-term impressions. and people in our swing voter focus groups do not see the difference between$4 gas and a nearly 7 % mortgage or a more expensive car loan. High costs are high costs. And voters say it's changing their lives. They can't do the things or buy the things they used to. They say they're not poor, they're broke.

6:15They can't go on vacation or they dipped into their 401k. And they can't afford the things that made up their middle class lifestyle. And that is a very big deal politically when the middle class feels they can't hang on. Well, speaking of things that the president and other Republicans are worried about, President Trump, he's been calling for lower interest rates. He handpicked Kevin Warsh to be his Fed Reserve chair and gave him a pretty clear marching order, like, I would like to see interest rates go down. That's the opposite of what just happened. Yep. Warsh did not do what Trump wanted him to do.

6:47And just a couple of days ago, Trump said the U.S. should be paying, quote, the lowest interest rates in the world. He's also threatened to cut off big chunks of U.S. trade if rates aren't cut. but it looks like his threats backfired. Yeah, I mean, if you're Kevin Warsh, the Fed had this real magnifying glass on it that markets, they were watching to see if the Fed was actually independent from political interference. Because we've seen other central banks in other countries, when they lose that independence, when they respond to political pressure, that could have serious consequences when it comes to inflation and really hurt an economy.

7:21Stephen, more rate hikes on the horizon? Yeah, the Fed has signaled that they expect another rate hike before the end of the year. So it's not like we're expecting a spree of rate hikes, but we are certainly not going to see rates go down like President Trump wants, at least not for a while. And this means consumers will likely continue to feel squeezed this year by both the cost of borrowing, along with the cost of just about everything else. And PR's Stephen Basaha and Mara Laison. Thank you both. Thank you. Thank you. This episode was produced by Gurjeet Kaur and Karen Zamora with audio engineering by Tiffany Vera Castro.

7:58Our director is Jonas Adams. It was edited by Rafael Nam, Kelsey Snell, Patrick Jaron Wadananen, and Tinbeet Airmus. Our interim executive producer is Courtney Dornick.

8:16It's Consider This. From NPR, I'm Mary Louise Kelly.