‘Don’t see the point of it’: Consumers feel the pinch as Fed raises rates again

Interest rates are now at a 22-year high, and Americans are starting to feel that the Federal Reserve is going overboard with its rate hikes.

Despite one of the fastest rate-raising cycles on record, U.S. employment levels have remained high, and a widely predicted recession has failed to materialize.

Wages for most workers are about where they would be if the pandemic had never happened, and annual inflation is only a single percentage point above the Fed’s target of 2 percent.

Notwithstanding commodity shocks resulting from the war in Ukraine and the pricing effects of corporate profit-maximization, it is seeming increasingly likely that inflation was a temporary consequence of the pandemic.

That includes the extra costs incurred by companies dealing with shutdowns that they then shoved along to consumers, as well as the safety-net spending undertaken by both the Trump and Biden administrations.

Given that inflation seems to be all but licked, Americans are growing tired of the Fed’s push to slow an economy that has resulted in better conditions for workers, reduced inequality and sent housing costs and mortgage rates through the roof.

“The Fed is trying whatever tools they have, but I don’t know if it’s necessary, because inflation has slowed down,” Jacob Abadi, a New Yorker who works as a buyer for a liquor store, told The Hill in an interview Tuesday.

“Inflation did slow down, so I don’t know the point of it. I see more of an issue with homes and buying a house,” Abadi said. “With regard to the rates, it’s just simply not affordable.”

Here are key takeaways about the economy to put the U.S. central bank’s latest rate hike in context.

Fed targets worker-friendly economy

Fed chairman Jerome Powell said Wednesday he wants to see a “cooling” in the labor market, which has been good for workers.

“What we’re looking for is a broad cooling in labor market conditions, and that’s what we’re seeing,” Powell said. “Wages have actually been gradually moving down.”

“We’re making progress there,” he added.

Wage-price spirals, in which higher wages compel higher prices and vice versa in a generally “overheated” economy, were not primarily at play in the current inflation cycle, as Powell has acknowledged.

Rather, amped profits in concentrated industries and a spike in basic commodity prices were the main factors that prolonged inflation following an initial supply crunch.

Real wages for most U.S. workers are now on track with where they were prior to the pandemic, even as broader wage measures that include managers and other types of employees are below trend, a fact that implies a reduction in inequality.

This is something that economists are saying isn’t getting enough attention.

“Apparently not enough people have digested this fact, so let me say this in plain English. Real wages for most American workers are not only higher than they were prior to the pandemic, but they are about what they would have been if the pandemic never happened,” University of Massachusetts Amherst economist Arin Dube wrote online last week.

“Average real (inflation-adjusted) wages for production [and] non-supervisory workers (more than 80 percent of U.S. private sector workers) are 2.7 percent above Jan. 2020 levels, and are at pre-pandemic trend,” he wrote July 14.

The “summer of strikes” continues

Workers have found that the favorable conditions are helping to win better labor conditions and wages.

Teamsters working for UPS announced a deal with the company Tuesday — nearly a week ahead of their deadline — averting a massive potential strike that would have dented the U.S. economy. The union touted what it described as “historic wage increases” secured as part of the deal.

“Existing full- and part-time UPS Teamsters will get $2.75 more per hour in 2023. Over the length of the contract, wage increases will total $7.50 per hour,” the union said in a statement Tuesday. “Existing part-timers will be raised up to no less than $21 per hour immediately, and part-time seniority workers earning more under a market rate adjustment would still receive all new general wage increases.”

The strong economy is not without its detractors

Despite worker-friendly conditions in the macroeconomy and roaring consumer sentiment, many Americans had an exceedingly tough time during the pandemic. Several told The Hill that they now see the effort to bring prices down by slowing economic activity with higher rates as misguided.

James Vesprey, who worked for more than two decades at a Marriott Marquis in Times Square, Manhattan, before being laid off during the pandemic, said he’s not experiencing the on-trend wages and is still having trouble securing a steady paycheck.

“How can you slow the economy when the price of a 20-ounce beverage, which used to be $1, is now $2? Right? It’s double the price of everything. Where can you balance it out?” he said.

“Rent is going up, and people are still making the same amount of money monthly, yearly, weekly, annually, however you want to put it. You know what I’m saying? The money hasn’t increased check-wise for the increase of everything else,” he said in an interview.

Vesprey told The Hill he’s still looking for a steady paycheck after being laid off.

“Since COVID, man, it’s been terrible. I worked 24 years at a job, and as soon as COVID came in, they fired 1,500 of us,” Vesprey said. “I worked at a Marriott Marquis in Times Square [at] 45th and Broadway.”

“After that happened, I was on unemployment, and after that exhausted, I’ve been trying to find a straight and steady job for however many years since COVID,” he said. “I applied several times back to the Marriott because they reopened the position maybe 15 times, but nope, nothing.”

The credit squeeze on most Americans is getting worse

Americans are also expressing anxiety about higher mortgage and financing rates, which are directly impacted by the Fed’s interest rate increases. 

David Dunn, a 29-year-old financial analyst in Central Illinois, told The Hill the central bank’s interest rate hikes have impacted his life as a new homeowner. Dunn recently bought a home and secured a mortgage rate of 6.75 percent, but his rate could have been lower, had he purchased it sooner.

“I know historically, going back to the ’80s or the early ’90s, it’s more in line with what’s typical. But yeah, that really cut into my budget of how much house I could afford,” Dunn said. 

“And that’s something that just — if I bought, say six months earlier, I could have had a lower interest rate,” he continued. “But just with how rapidly rates have gone up, that really impacted me, without a lot of time to respond and plan my life around that.”

Jen Gilbert, a 54-year-old auto claims adjuster outside Tulsa, Okla., told The Hill that her family had to buy a new vehicle. Even though she and her husband negotiated a great price and have excellent credit scores, she said the interest payments are “killing” her.

“It was so stressful,” Gilbert wrote. “I had an old junker that we had paid cash for, and we kept it together as long as we could. We finally couldn’t put off buying any longer. We knew the rates had gone up, but I think we both deluded ourselves into thinking that our good credit scores would help us.”

The recession that didn’t happen

After implicitly withdrawing a “mild recession” prediction made in March at the Fed’s last meeting, Powell said formally Wednesday that the Fed is no longer expecting a recession this year — proving an entire chorus of market commentators flat wrong.

“A survey of fund managers conducted by Bank of America found that 77 percent believe a global recession was imminent,” Forbes Magazine reported in January of this year.

“Updating my macro framework and refreshing some of my leading indicators, the base case seems to be a relatively severe recession hitting around March/April 2023,” Alfonso Peccatiello wrote in the Macro Compass newsletter last November.

Business owners are still hiking prices in response to wages

While the 2022 inflation tended to be more input cost-driven at the beginning of the current cycle and more profit-driven toward the end of the current cycle, business owners are still saying they’re hiking prices as a result of the need to pay people more.

“The ones that can do the work, they’re charging like $200 an hour, which is absolutely ridiculous,” construction business owner Sharon Bracey told The Hill in an interview. “So there goes the inflation part, now I’ve got to charge more on my prices, and there goes the cycle.”

Bracey, who said he owns his own house and car and described himself as “debt free,” said he didn’t have as much control over his workers as he used to and described this as a “struggle.”

“I’m getting contracts, but we need the manpower,” he said. “That’s the fight that you always have to do as a construction [business] owner. You can get the work, but you also need the balance of the actual workers that can do the work. And that is the struggle.”

Adam Barnes and Taylor Giorno contributed.