UT Tyler expert explains why interest rate increase could combat inflation

TYLER, Texas (KLTV) - In an effort to cool down the inflationary economy, the Federal Reserve raised its key interest rate by three-quarters of a percent today. It’s the largest increase in nearly three decades.

They’re trying to avoid another recession and an increase in interest rates could help combat inflation.

Interest rate is the cost of money, how much the Federal Reserve Bank is charging commercial banks to lend money to the public. Manuel Reyes is the Director of Hibbs Institute for Business & Economic Research at UT Tyler and said, “If they lower the interest rates they’re stimulating the economy so the cost of money is cheaper, so you are able to borrow money to buy a house, to buy a car, for your credit cards, to consume.”

Which is what we saw as we were getting out of the pandemic, as the federal reserve was trying to get the economy moving again. But now they have increased interest rates by three-quarters of a percent. Reyes said we want to have inflation controlled around two percent, we’re currently around 8.5 percent.

“So we need, now, to increase the interest rates so we can kind of slow down the economy because what we did in the past is not, I don’t want to say it’s not working, but it’s not enough,” he said.

By increasing rates, the goal is to slow borrowing down. Reyes said it’s not an overnight change, it will be gradual. Ideally, we want to grow and then slow down which Reyes said is called a soft landing.

“So we control inflation and we’re okay, so we’re ready to start growing, that could be maybe next year. But what we don’t want and is also an option is that we can keep growing and then the dis-acceleration is going to end in another recession,” Reyes said.

So what do the higher rates mean for consumers?

“It will charge you a higher interest rate, same deal if you’re trying to buy a house, same deal if you’re trying to buy a car, or in your credit cards,” he said. “All the people that were buying a house, less people are going to buy a house now and fewer people are going to buy a car so we can control prices.”

The Federal Reserve’s committee meets once every six weeks to discuss and set target federal rates.

Copyright 2022 KLTV. All rights reserved.