High interest rates take a toll on America's finances: Allianz

The Fed could hike interest rates again this week despite inflation cooling

The Fed is set to meet July 25 to July 26. (iStock)

The Federal Reserve raised interest rates 10 times since March 2022 in order to lower inflation. But the move has taken a toll on the wallets of many Americans, according to a survey by the Allianz Life Insurance Company of North America.

In fact, 61% of Americans said they took a financial hit due to rising interest rates in the past 12 months, Allianz reported. Rising interest rates could make it more expensive to take out a mortgage, finance a vehicle and perform other financial transactions. 

It could also impact the interest rates consumers pay on credit cards and other forms of debt. In the first quarter of 2023, Americans’ collective debt hit a record of more than $17 trillion. In particular, credit card debt was at a near-record high of $917 billion, according to a report by TransUnion.

"Credit cards are one of the most common financial products in our country, providing the bulk of short-term credit for families," the CFPB said in a post. "Interest rates on credit cards have risen substantially, with average interest rates going over 20%. Given the trends for the 175 million Americans with credit cards, the CFPB estimates that outstanding credit card debt may continue to set records and could even hit $1 trillion."

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Will the Fed raise interest rates in July? 

After the Fed met in June, Fed Chair Jerome Powell expressed that the central bank could raise interest rates again in order to bring inflation down to its target range. 

"Looking ahead, nearly all Committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2 percent over time," Powell said at a press conference after the last meeting. "And I will have more to say about monetary policy after briefly reviewing economic developments." 

In June, the Fed paused interest rate hikes after May’s reports showed signs of inflation cooling and an increase in the unemployment rate – both signs that the Fed is meeting its policy goals. 

In June, job growth slowed as the unemployment rate held steady. But it may not be enough for the Fed to keep the pause on interest rate hikes, according to Jim Baird, Plante Moran Financial Advisors chief investment officer.

"The jobs market isn't nearly as brisk as it was over the past few years, but even the sharp slowdown in job creation hasn't been enough to push the unemployment rate meaningfully higher – a key ingredient to the Fed's recipe to bring inflation back down to its 2% target," Baird said in a statement. "The 'long and variable lag' in monetary policy notwithstanding, there's not yet been enough evidence in the hard data to convince policymakers that enough has been done to arrest inflation." 

Inflation increased 3% in June, reaching a two-year low, according to the latest Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS). 

But these readings may not indicate the Fed is close to hitting its target, according to Morning Consult Chief Economist John Leer.

"CPI inflation slowed to 3% in June, but don't expect the Fed to stop raising rates," Leer said in a statement. "The Fed cares primarily about the trend in core PCE inflation, which has been persistently elevated for the past six months. One month of encouraging CPI data isn't enough for the Fed to make a dovish pivot, particularly as it seeks to maintain credibility with financial markets."

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Americans are concerned about a recession 

More than half (64%) of Americans worry that recession is around the corner, according to the Allianz survey. That marked an increase from 57% in the first quarter. Baby Boomers are particularly concerned as 67% said they’re worried about a recession, as opposed to 63% of millennials. 

"Many Americans worry that rising interest rates are a harbinger of a recession," Kelly LaVigne, vice president of consumer insight at Allianz Life, said in a statement. 

While there's no official definition of a recession, many economists suggest it represents an economic downturn marked by two consecutive quarters of loss in gross domestic product (GDP). However, GDP increased at an annual rate of 2% in the first quarter of 2023, according to the third and final estimate released by the Bureau of Economic Analysis (BEA). GDP increased by 2.6% in the final quarter of 2022. 

Still, an economic slowdown could be possible. 

"A range of leading indicators point to a meaningful probability of recession in the coming quarters at the same time that the Federal Reserve ups the ante on rate hikes as they continue to wage their focused fight to tame inflation," Baird said.

And some experts predict the globe could be heading into a recession.

"The global economy is on a downward trend, weakened by high inflation, tighter monetary policy, tight labor markets, mild recessions in several economies, weakness in China’s growth, and pandemic-driven economic scarring," The Conference Board said in a post

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