The Fed’s First Interest Rate Hike of the Pandemic

The Fed’s first interest rate hike of the pandemic means car loans, mortgages, and credit card payments are getting pricier

  • The Federal Reserve raised interest rates on Wednesday, ending the near-zero rates of the pandemic.
  • The move comes as the Fed looks to tame inflation, which is holding strong at four-decade highs.
  • The rate hike will translate to pricier car loans, mortgages, and credit card payments.
  • The record-low interest rates seen throughout the coronavirus crisis are no longer.

The Federal Reserve raised its benchmark interest rate on Wednesday, ending a two-year period of near-zero rates and taking its biggest step yet toward cooling inflation. The Federal Open Market Committee lifted the federal funds rate by 0.25 percentage points, matching forecasts broadly held by economists for weeks. The move kicks off a cycle of rate increases expected to last throughout the rest of the year at the very least.

“The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run,” the Fed said in a statement. “In support of these goals, the Committee decided to raise the target range for the federal funds rate to 0.25% to 0.5% and anticipates that ongoing increases in the target range will be appropriate.”

The Wednesday hike will reverberate throughout the economy in the coming weeks. Lenders’ rates are directly influenced by the Fed’s benchmark, and when the central bank raises its own rate, borrowing costs around the country edge higher. That means all forms of borrowing from car loans to credit card interest payments are poised to get slightly more expensive.

The rate increase officially reverses one of the Fed’s main policy supports used to aid the virus-slammed economy. The central bank pulled rates close to zero in March 2020 as the coronavirus’s spread sparked widespread lockdowns and froze economic activity across the country. The historically low rates helped people and businesses borrow cash at low costs, giving Americans a major support as the country slid into the deepest recession in nearly a century.

  • Inflation is the highest since 1990 and it’s ending some of Americans’ favorite bargains.
  • Dollar pizza slices, cheap Trader Joe’s wine, and even some dollar stores themselves don’t cost what they used to.
  • Here are the deals inflation killed and why they’re likely gone forever.

Some of America’s favorite bargains are dead. Blame the highest inflation since 1990.

The economy is rebounding quickly, but Americans are paying the price. Massive demand has crashed into limited supply, leading businesses to hike prices at the fastest rate in decades. The Biden administration and the Federal Reserve expected the elevated inflation to quickly fade, but as the supply-chain crisis persists, prices continue to surge higher.

October data show inflation plaguing nearly every part of the US economy. In some areas, rising prices have eliminated famous deals altogether. Year-over-year inflation of 5% might not sound like much, but it means the difference between a $1 bargain and a less-compelling deal.

Here are cheap buys that inflation has killed for good.

 

 

1. Dollar Tree (and dollar stores)
The last remaining major dollar store chain in the US to stand by the $1 commitment, Dollar Tree just officially raised prices to $1.25 this month.

After years of investor pressure, the discount chain finally buckled under rising supply chain and labor costs. The new price point will enable it to absorb these costs and bring profit margins back to historic levels, company execs said.

It’s also leaning into its Dollar Tree Plus collection, an assortment of items that cost between $3 and $5, which will be rolled out to 5,000 stores within the next two years.

2. Two-buck Chuck
Trader Joe’s’ cheapest wine keeps getting pricier. The Charles Shaw brand rose to fame for its initial $2 price tag, which led to its colloquial nickname of “two-buck Chuck.” Yet finding a bottle for $2 is harder than ever.

The grocery chain first hiked prices in 2013 to $2.49, denting the wine brand’s reputation but not quite killing the moniker. Yet price growth since has led to some locations selling bottles for as much as $3.99, according to Food & Wine.

The uptick isn’t even across the US.

Trader Joe’s announced in early 2020 it would lower the price of some Charles Shaw wines in California back to $1.99 by changing the glass bottle and cork design. Yet other regions were still stuck with the higher price tag, and some California residents have since complained online that prices have rebounded from $2. Others said that, while the wine retains its $2-per-bottle price, the deal is only available when buying an entire case.

3. The dollar slice
Few regional delicacies offer the utility of New York’s $1 pizza slice. That, too, has fallen victim to inflation.

Many of New York’s low-price pizzerias have ditched the $1 benchmark for higher prices amid pandemic-era inflation, The New York Post reported earlier in November. Rising costs for garlic, flour, and even the gas used to power pizza ovens have killed the dollar slice.

“I can list about 200 items that I’m buying for my store every week and every one of them went up 50% to 200%,” Leonardo Giordano, president of Mona Lisa Pizzeria and Ristorante in New York, said in a November Facebook comment.

The damage isn’t too bad for New Yorkers. Many restaurants only hiked their per-slice prices to $1.50, still undercutting most upmarket competitors. But with inflation still trending at historic highs, its unlikely anyone will be able to trade a $1 bill for a New York slice anytime soon.

4. Little Caesar’s $5 Hot-N-Ready pizza
Little Caesar’s just announced that its classic $5 Hot-N-Ready pizza will no longer cost $5. The chain’s staple will now sell for $5.55, an 11% price increase and the first in 25 years.

The pizza chain is promoting the news as an even better deal. “Change is good when it comes to giving our customers more of what they love,” chief marketing officer Jeff Klein, said in a statement “And we’re changing our iconic HOT-N-READY Classic, adding 33% more savory, meaty pepperoni still at the country’s most affordable price”

Along with the price increase, the new version will also come with 33% more pepperoni, Little Caesar’s says. The new price will be available for a limited time, and then it could cost more based on location.

At $5.55, Little Caesar’s is still affordable compared to competitors. A similar large pepperoni pizza at Domino’s or Pizza Hut costs between $13 and $16, depending on location.

But while cheap cash offered a bridge for struggling households, it also played a role in allowing inflation to hit the fastest pace in four decades. Low borrowing costs encouraged spending and helped demand rebound throughout 2021. Spending boomed, but supply struggled to keep up. The gap between the two led businesses to raise prices at a faster pace, kickstarting the inflation problem the country faces today.

 

 

The benchmark interest rate serves as the Fed’s top tool for cooling the economy and pulling inflation lower. By raising rates, the Fed can dampen demand and, in turn, close the imbalance that fuels inflation.

Whether the Fed timed its rate decision correctly remains to be seen. Many economists have blamed the central bank for allowing inflation to hit historic highs, arguing policymakers moved too late to slow the price surge. Former Treasury secretary Larry Summers has been among the Fed’s biggest critics in recent months. Summers has repeatedly slammed the Fed for the inflation problem and, in a Tuesday column in The Washington Post, said the late rate hike risks persistently high inflation and a new economic downturn.

 

“The Fed’s current policy trajectory is likely to lead to stagflation, with average unemployment and inflation both averaging over 5 percent over the next few years — and ultimately to a major recession,” he said.

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