Last week, the Federal Reserve boosted its short-term interest rate by three-quarters of a percentage point for the third time to help curb inflation, which is still hovering near a 40-year high.
Raising interest rates "will also bring some pain to households and businesses. These are the unfortunate costs of lowering inflation," Federal Reserve Chairman Jerome Powell said at a conference in August.
Inflation is already rising. Americans cut back on their diets, debate which bill to pay and when, and line up at food banks. But it is a bleak irony that those hardest hit by inflation -- low- and middle-income Americans -- may be hurt most by the Fed's rate-cutting actions.
“You get hurt right away by higher interest rates while the impact on inflation may take some time. Hit hard,” said Michael Weber, assistant professor of finance at the University of Chicago's Booth School of Business.''
Higher interest rates make buying a home more expensive and difficult at a time when average rent has hit a record high as landlords pay more for properties and loans to repair. Americans will pay more interest on their credit card debt, even as they rely more on those cards to pay for food and other necessities.
And if the unemployment rate rises as Fed officials expect, millions could end up out of work.
So what to do in the meantime, with interest rates rising and inflation continuing to rise? Can we do more to help low- and middle-income Americans who seem to be in financial trouble?
Butter, eggs, cereal see double-digit price hikes
How Americans are affected by rising interest rates and costs may differ depending on where they sit.
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"The lowest-income households, say bottom 20%, tend to not carry a ton of debt having incomes too low often to even qualify for significant loans,'' L. Josh Bivens, research director with the left-leaning Economic Policy Institute (EPI), said in an email.
However, "the next 40% up from that and into the more comfortable middle-class carry quite a lot of mortgage and credit card debt,'' he says. So they "will indeed feel a bigger pinch from higher interest rates."
Meanwhile, the poorest Americans may be particularly pressed by the soaring costs of groceries. Among income earners in the lowest 20%, 15.8% of their annual spending goes towards food, according to the Bureau of Labor Statistics. That compares with income earners in the top 20% whose share of yearly spending on food is 10.9%.
The prices of some of the most basic items on a family's kitchen table have increased by double digits. Eggs spiked roughly 40% between August 2021 and August 2022, while the cost of cereals rose over 16%. Dairy prices increased more than 16% and butter and margarine cost 29.3% more.
"The impact is going to be most severe on people on the bottom, and that’s the concerning part,'' says Nada Eissa, associate professor of public policy and economics at Georgetown, and research associate at the National Bureau of Economic Research (NBER).
And then there is the specter of rising unemployment.
Job growth remained robust this summer, with the U.S. adding another 315,000 jobs in August and average hourly pay rising 5.2% annually. But the Fed forecasts the 3.7% jobless rate will increase to 4.4% by the end of next year, far above its previous projection that unemployment would bump up to 3.9%.
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Getting inflation under control "will require slower employment growth and a somewhat higher unemployment rate,'' Susan Collins, head of the Federal Reserve Bank of Boston, said Monday according to written remarks.
And while it's not certain who will wind up losing their jobs, lower-income workers have been more likely to be laid off during past downturns than their higher educated, higher-paid peers, says Andrew Stettner, a senior fellow at The Century Foundation, a left-leaning think tank.
Turning to credit cards
So, with their costs rising and so much uncertainty, many Americans have been leaning on credit cards to get by.
A LendingTree survey in March found that 56% of those surveyed wouldn't be able to pay all their monthly bills without using a credit card. And nearly one in four of those consumers needed to charge essentials like groceries and housing.
The survey also found that 28% of consumers said their use of credit cards had risen as of March compared with the same time in 2021. Millennials, families with small children, and consumers earning less than $35,000 relied on credit the most.
That increased use comes at a time when credit-card interest rates will rise because of the Fed's actions.
Now, some economy watchers and financial experts say that benefits aimed at helping Americans weather the COVID-19 crisis need to be revived or extended during this latest financial blow.
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The federal financial relief during the pandemic included multiple stimulus payments and an expanded child tax credit, which reduced childhood poverty and gave many lower-income Americans a much-needed financial cushion, various researchers have found.
"Even if the Fed is successful in its fight against inflation, it’s going to take time to have a really significant impact and to knock down inflation in a major way,'' says Matt Schulz, chief credit analyst for Lending Tree. "And in the meantime, you have folks who really need help.''
Low-income families tended to have 70% more cash in September 2021 than they did in September 2019, before the global health crisis, according to the JPMorgan Chase Institute.
And a report by the Food Research & Action Center found that 95% of large school districts said pandemic-related waivers that enabled all students to get free meals at school, no matter their family's income, reduced hunger among children.
But one by one, those economic supports have ended. Free school meals for all stopped in September. And a month after the expanded child tax credit ended in December, 3.7 million children fell into poverty, according to a study by Columbia University's Center on Poverty and Social Policy, with Black and Hispanic children seeing the highest increases.
The next benefit, set to expire at the end of September, is a federal provision that increased the amount of fruits and vegetables that could be purchased with vouchers issued by the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC).
Given the rise of inflation, that food assistance is even more critical, says Schulz of Lending Tree. "It’s an important service,'' he says, "and it’s certainly worth examining continuing this benefit expansion.''
Tariffs, Taxes and Targeted Benefits
Some economists and conservative lawmakers argue however that it was the flood of financial assistance during the pandemic that helped stoke inflation in the first place.
“The general idea is that we would have had some inflation, but the fiscal stimulus definitely increased it substantially,’’ says Scott Lincicome, director, general economics and trade for the Libertarian-leaning Cato Institute.
Enacting similar spending measures to help Americans deal with rising interest rates and inflation would make the economic situation worse unless there is a definite way to pay for them, he says.
“Spending more money without any offsetting tax hikes would inevitably throw another log on the inflationary fire,'' said Lincicome.
But many people are struggling to put food on the table and keep a roof over their heads. And they will likely suffer even more as they wait for economic forces beyond their control to have an impact.
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"We are seeing some signs of an increase in food insecurity,'' said Eissa of Georgetown. "I expect to see ... an increase in debt over time. We have already seen some of the large employers announce job cuts. ''