December 4, 2023

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Fed interest rate hike and what it means for Houston residents

The Federal Reserve on Wednesday delivered another rate hike in its campaign against inflation, raising the cost of borrowing during the holiday shopping season, even as Houston households and businesses still face the threat of a recession.  

The 0.5 percentage point increase, the seventh hike this year, pushes the rate banks charge each other for overnight loans to its highest level in 15 years at a range of 4.25 to 4.5 percent. Here’s what Houston consumers should know about the Fed’s action, which will likely affect the rate of interest they’ll pay on credit cards, car purchases and home loans. 

1. Inflation seems to be moderating, even if it doesn’t feel that way

The goal of this year’s rate hikes has been to bring down inflation, which soared to a 45-year high in June and reached double digits in the Houston area. 

There’s some reason to think the rate hikes are making a difference. The consumer price index increased by just 0.1 percent in November, according to the Bureau of Labor Statistics, after rising 0.4 percent in October. That brings inflation over the past twelve months to 7.1 percent, from 9.1 percent in June.  

Gasoline prices have also fallen, according to fuel-price tracking service GasBuddy. The average price of a gallon of regular was $2.58 in the Houston area compared with record highs of more than $4.00 in summer. Nationally, the average price is $3.18. 

The price of groceries, meanwhile, may not have fallen much but at least appear to have peaked, according to Armando Perez, executive vice-president of H-E-B, who offered his assessment at a recent gathering of the Greater Houston Partnership. 

“We probably won’t see a retraction of prices,” says Patrick Jankowski, GHP’s senior vice president of research. “We may see them return to a more normal level of appreciation.” 

2. Borrowing could get even more expensive

The Fed’s actions have already doubled the nation’s average mortgage rate for a 30-year fixed loan, to more than 7 percent last month.

As a result, sales of existing homes have fallen for seven consecutive months. There were 6,641 closings on single-family homes in October, according to the Greater Houston Partnership, compared with 8,606 in October 2021. 

For many other large purchases, Americans are still borrowing money. In October, consumer spending on durable goods such as appliances, furniture and cars, 2.1 percent, as overall consumer spending rose 0.8 percent. 

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The explanation may be that inflation shapes our purchasing behavior as well as slashing our purchasing power. 

“When consumers see prices constantly rising, they tend to buy now rather than risk a higher price in the future,” observes Kurt Rankin, senior economist for Pittsburgh’s PNC Bank. 

3. The Fed’s war on inflation is ‘ongoing’  

Fed Chair Jerome Powell is still in a hawkish mood, committed to returning inflation to 2 percent, even though there’s a risk of pushing the U.S. economy into recession and a possibility that some Americans will lose their jobs.  

“We have more work to do,” Powell said, emphasizing that the rate hikes will be “ongoing.” 

In other words, we should expect more rate hikes next year. 

Powell acknowledged that rate hikes can cause “some pain,” as he put it this summer, and conceded that the Fed’s plans could change in light of economic conditions: “No one knows with any certainty where the economy will be a year or more from now.” 

Still, he argued that arresting price increases over the long term is imperative, even if it leads to slower economic growth in the short term as well as a modest increase in the unemployment rate, which stands at 3.7 percent nationally, 4.0 percent in Texas, and 4.1 percent in the Houston area. 

“We will stay the course until the job is done,” he said. 

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