Why The Fed Raising Interest Rates Helps Inflation And What It Means
Maybe your like
- Explainers
- Politics
- Culture
- Advice
- ListenPodcast
- WatchVideo
- Login / Sign Up
- VideoWatch
- PodcastListen
- CrosswordPlay
- Explainers
- Politics
- Culture
- Advice
- Science
- Technology
- Climate
- Health
- Money
- Life
- Future Perfect
- Newsletters
- Archives
- Youtube
- RSS
- TikTok
We need your support in 2026
When news breaks, you need to understand what actually matters. At Vox, our mission is to help you make sense of the world — and that work has never been more vital. But we can’t do it on our own.
We rely on readers like you to fund our journalism. Will you support our work and become a Vox Member today?
Join now- Money
The economy will feel worse before it feels better.
by Emily StewartUpdated Jul 28, 2022, 3:50 PM UTC- Share
- Gift


If you are a person living in the United States right now, you are probably at least medium worried about the economy. From inflation to the stock market, a lot about money feels pretty lousy. The good news: The Federal Reserve is taking action to try to bring down inflation and get the economy back to whatever normal is. The bad news: The action it’s taking isn’t going to immediately make everything better, and in the shorter term, it could make things feel worse.
“Getting inflation lower is usually painful because the Fed mainly has in its policy toolbox tools that make things even less affordable because the Fed’s policy toolbox is geared toward cooling demand,” said Gregory Daco, chief economist at EY-Parthenon. “If the Fed manages to cool demand, then there will be less price pressures, but cooling demand entails essentially making things more expensive.”
To put it more plainly, the idea is to tamp down consumer spending and slow business expansion by increasing costs in other areas (namely, borrowing and loans). The Fed is trying to get you, for now, to stop buying so much stuff.
On Wednesday, the Federal Reserve raised interest rates by three-quarters of a percentage point. It made the same hike in June, which marked the biggest increase in 28 years. This marks the Fed’s fourth interest rate hike this year as the Fed tries to bring down inflation.
The Fed is trying to get you, for now, to stop buying so much stuff
The hope is that, eventually, the Fed’s moves will bring down prices that people have definitely noticed creeping up all around them. But they will have shorter-term implications as well. Higher interest rates mean consumers should expect the cost of their credit card debt, mortgages, and car loans, among other items, to go up. The cost of borrowing for businesses will increase, too, and companies are likely to slow down on investments and hiring. The stock market has for weeks been reflecting some anxieties over the Fed as well, as higher interest rates cut into valuations and profits.
The forest that it’s hard to see for the trees is a more balanced economy on the other side, but some of the trees are pretty thorny.
Sign up for The Big Squeeze newsletter
Emily Stewart’s column exposes the ways we’re all being squeezed under capitalism. Sign up here.
“Rates have already gone up, we already are in a transition phase where the economy is slowing down. The pieces are being put in place for a rebalancing of demand and supply, but it doesn’t happen overnight,” said Brian Bethune, a financial economist at Boston College. “It’s usually a bumpy ride.”
What the Fed is trying to do
The Fed’s line for a while was that inflation would be transitory: Once some of the kinks in the economy, such as supply chain crunches, were worked out, it would begin to fade on its own. But in recent months, the Fed has taken a more assertive stance. Powell has made a hawkish pivot, acknowledging inflation is “much too high” and indicating he’s dedicated to getting it down.
The Fed has three main tools at its disposal to try to gain control of the situation, Daco explained. The first is forward guidance, as in, communication: talking to the public and saying what its intentions are in terms of monetary policy. Basically, if the Fed says it’s going to take control of the situation, the public — hopefully — believes it will. The second tool is raising the federal funds rate — the interest rate banks charge other banks — which will trickle out across the economy across interest rates and make it more expensive to borrow. (With Wednesday’s hike, the federal funds rate is 2.25 to 2.5 percent, and officials expect it to be above 3 percent by the end of the year.) The third is balance sheet normalization, which the Fed is just undertaking. It is starting to unload some assets, such as Treasuries and mortgage-backed securities, which should tighten financial conditions, though it will take some time.
Combined, this is intended to deter spending and lead to less money sloshing around in the economy overall. There are wide-ranging effects.
“When the Fed tightens monetary policy, that has a direct effect on equity prices, on long-term interest rates, on corporate bond spreads, on volatility, on the value of the dollar, on a number of financial measures,” Daco said.
Companies become more reluctant to invest and hire as credit becomes more expensive, the cost of equity increases, and the environment becomes more volatile. Declining markets have a negative impact on consumer moods, which also affects spending. There’s an intended chilling effect across the economy — one officials hope will not lead to a recession, though there are no guarantees. The Fed is walking a tightrope in trying to get from an accommodative, easy-money scenario to conditions that are normalized and tightened — without disrupting the economy too much.
This all is guaranteed to cause some short-term disruptions and problems, but in the long run, it’s all supposed to be worth it.
“We have to endure the short-term pain in the economy in order to get inflation back under control,” said Tara Sinclair, a senior fellow at the Indeed Hiring Lab. She compared the Fed hiking interest rates and tightening monetary policy to a medical treatment that might require patients to undergo something painful in order to have longer-term health. “Then, going forward, we can have a much more stable environment where we know prices are going to be growing about 2 percent per year, we have more certainty about that, we have a better sense of demand and supply coming together. That’s a better working environment for the economy as a whole, and businesses want that kind of certainty.”
If the Fed were to not increase interest rates and get inflation expectations in check, the risk is that prices would continue to spiral upward. Workers will also ask for higher wages, companies will raise prices to pay those wages, and it becomes a sort of cycle of doom. The central bank’s task now is to stop that from happening and to try to keep high inflation from becoming entrenched.
What this all means for you
What the Fed’s interest rate hike Wednesday means, and what it does going forward (basically, how fast it moves and how much), for different people depends on their position in the economy. If you’re a saver, this is not a bad deal for you. If you are looking to buy a house, yeesh.
In recent years, interest rates have been so low there’s been very little incentive to save. When rates go up, savers get higher interest rates and can make more money. “Conservative savers that have their money in the bank or bonds or whatever and stayed away from risky things have been paid nothing,” Bethune said.
If you’re a saver, this is not a bad deal for you. If you are looking to buy a house, yeesh.
For borrowers, the situation is quite the opposite. Mortgages have already shot up, with the 30-year fixed mortgage rate surging in June, though it’s since come back down somewhat.
Car loans will become more expensive, as will credit card debt.
“For credit cards, it’s going to show up pretty quickly, and it will impact not just things you buy in the future but your current balances, too,” said Matt Schulz, chief credit analyst at Lending Tree. Usually, when the Fed raises rates, credit cards’ APRs (annual percentage rates) go up by about the same amount within a billing cycle or two, he said. “Generally, these individual rate hikes aren’t enough to really rock anybody’s world financially. The danger is when you have a lot of them in a short period of time, they add up pretty quickly and can be pretty impactful.”
Companies are likely to slow down on expansion and hiring, which we’ve already seen in some arenas, such as the tech sector. Depending on how aggressive the Fed is going forward, the economy could very well see an uptick in unemployment and more layoffs. (That said, firms may be a little more reluctant to lay off employees given how hard it was to re-hire during the pandemic.) Anxious companies reluctant to hire could just make it harder to find a new job.
If you’ve got money in the stock market, whether you’re day trading with Robinhood or just investing through your 401(k), things are already looking a little rough. In the long term, stocks generally go up, and most experts would advise you to hold on. Markets could continue to be rocky for a while, though how the market will react to any single piece of news — or, really, why it does anything — is hard to predict.
This is just not going to be very fun for a while
I would like to tell you that there are a million things you can do to completely insulate yourself from some of the pain that’s ahead, but then I would be lying, which I generally try not to do. So instead I will just say this: This sucks. Everything’s expensive, and for a while some things are going to be more expensive, and then eventually things will not be more expensive anymore. In the meantime, it’s not going to be particularly enjoyable. And there could be a recession on the way, or maybe we’re already in one!
One thing consumers can do to navigate the moment is to reduce some spending. Maybe put off the summer trip that hasn’t been booked yet, or save that home purchase for a later date, if possible. Walk instead of driving to your destination. “That’s something that will put them in a better position going forward, but also they’ll do their part in contributing to reducing demand,” Sinclair said.
Schulz said that if you have credit card debt, try to pay it down now, before rates go up even more. “That debt is only going to get more expensive in a pretty big hurry. It would definitely be smart to try and knock down that debt as much as you can,” he said. In its monthly review of credit card offers, Lending Tree found that the average APR on new credit cards in July is over 20 percent.
One fun fact, or rather, tip: Consumers can call and ask to have their credit card interest rates reduced and, often, find success. According to Lending Tree, more than two-thirds of requests for lower credit card APRs are granted.
There are some measures you can try to take to prepare in the event of an economic downturn, such as building up savings and trying to be extra nice to your boss. But the real answer on how to prepare for a recession is sort of that you can’t.
“If you prepare for a recession, you end up having that recession”
“If you prepare for a recession, you end up having that recession. I mean, it’s pretty simple. Recessions are self-fulfilling prophecies,” Daco said. “If one person prepares for a recession, that’s fine, they’re going to retrench, they’re going to buy a little less, they’re going to be more careful with their outlays. That’s fine. But if 300 million or 350 million people do the same thing, if everybody cuts their spending by 5 percent, well, then there’s a 5 percent correction in spending, so that entails a recession.”
Still, the overall takeaway is that the going will be tough for a while, and some people will be able to better manage than others. “Just put off buying a car” isn’t realistic advice for everyone. There’s only so much the Fed can do on the economy’s current woes as well. It can take action on the demand side, but there’s not a lot for it to do on supply, which is where a lot of problems with energy and food prices are stemming from. Gas prices are likely to remain high for a while. Other factors putting pressure on prices, such as Russia’s war in Ukraine and the global Covid-19 outbreak, are beyond the control of anyone in the US government.
The economy, which feels terrible right now even if it isn’t really on paper, is about to get worse for a lot of people before, eventually, it gets better.
“The long-term situation the Fed feels that is much more important for them is to go ahead and reduce the pressures on the economy … so that we have a healthier, stable economy going forward,” Sinclair said. “That will set the economy up for better long-term growth.”
Now, everybody has to wait and see whether this pans out, and, in the meantime, deal with their rising gas receipts and credit card bills.
Update, July 28, 11:50 am: This story was updated to reflect a July 27 Federal Reserve announcement and current mortgage rates.
See More:- Business & Finance
- Explainers
- Money
- Politics
Most Popular
- Trump’s occupation of Minneapolis has broken the Justice Department
- Why a Republican Supreme Court just handed a victory to Democrats
- Take a mental break with the newest Vox crossword
- We have a miraculous anti-aging vaccine. Why aren’t more people getting it?
- The hidden double standards driving our housing crisis
Today, Explained
Understand the world with a daily explainer, plus the most compelling stories of the day.
Email (required)Sign UpBy submitting your email, you agree to our Terms and Privacy Notice. This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.Advertiser Content FromThis is the title for the native ad
More in Money
The hidden double standards driving our housing crisis
The HighlightWe’re in an economic boom. Where are the jobs?
PlayTrump’s polls are tanking. What does his base think?
PodcastHow the prenup became mainstream
Wall Street buying up houses is good, actually
Why expensive airline “premiums” don’t feel special at allFuture PerfectFeb 4
Future PerfectFeb 4The hidden double standards driving our housing crisisApartments are safer and more affordable than single-family homes. Why do we treat them like a hazard?
By Marina BolotnikovaThe HighlightFeb 3The Highlight
The HighlightFeb 3The HighlightWe’re in an economic boom. Where are the jobs?AI is sending stocks soaring, rich people are spending big, and hiring is at a crawl. Here’s why.
By Heather LongPodcastsJan 31
PlayPodcastsJan 31Trump’s polls are tanking. What does his base think?A MAGA diehard on ICE in Minneapolis, the Epstein files, and what Trump must do before the midterms.
By Astead HerndonPodcastsJan 25
PodcastPodcastsJan 25How the prenup became mainstreamThe surprising embrace of prenuptial agreements by millennials and zoomers, explained.
By Avishay Artsy and Noel KingPoliticsJan 23
PoliticsJan 23Wall Street buying up houses is good, actuallyThe surprising truth about corporate investment in housing.
By Eric LevitzCultureJan 22
CultureJan 22Why expensive airline “premiums” don’t feel special at allFrom getting to pick your seat to boarding in a better zone, airlines have turned “premium” add-ons into big profits.
By Alex Abad-SantosAdvertiser Content FromThis is the title for the native ad
Tag » How Does Raising Interest Rates Help Inflation
-
Inflation Is High. How Will Rate Increases Fix That?
-
How Raising Interest Rates Helps Fight Inflation And High Prices
-
Why Does The Fed Raise Interest Rates? - The Washington Post
-
How Do Increasing Interest Rates Affect Inflation? - CNBC
-
Why Does The Fed Care About Inflation?
-
Inflation & Interest Rates Relationship Explained - Investopedia
-
US Makes Huge Interest Rate Rise To Tame Soaring Prices - BBC News
-
What Is The Link Between Inflation And Interest Rates?
-
How Do Interest Rates Affect Inflation? - Times Money Mentor
-
How Does Raising Interest Rates Help Curb Inflation?
-
How Interest Rate Hikes Ripple Throughout The Economy - Vox
-
How Raising Interest Rates Curbs Inflation - The Conversation
-
How Does Raising Interest Rates Control Inflation? - YouTube
-
How Will Interest Rate Hikes By The Fed Affect Asia? - ADB Blog