The fight against inflation may cause pain. Here’s how Americans will feel it

Federal Reserve Chair Jerome Powell sounded a warning to Americans last month as the central bank continues its efforts to combat high prices: The fight against inflation is going to be painful.  

“Higher interest rates, slower growth and softer labor market conditions will bring down inflation. They will also bring some pain to households and businesses,” Powell said last month. 

The Fed has hiked interest rates four times this year already in an effort to stanch price increases.  

When the Fed raises interest rates, money becomes more expensive to borrow, harder to get, and more worthwhile to save. The goal is to bring down the amount of money consumers and businesses are willing to spend to a level where firms can no longer afford to keep raising prices for their goods and services.  

In other words, the Fed wants demand for goods and services to fall closer to supply which has dwindled as a result of obstacles created by the COVID-19 pandemic, the war in Ukraine, and other shocks. 

In an ideal world, the Fed can raise interest rates gradually enough to bring inflation down without slowing the economy. But economists generally agree that inflation has risen too high for the Fed to bring it down without causing at least some hardship. 

“We’re taking a very distributed pain that’s very unpopular because it touches everybody,” said Claudia Sahm, a former Fed research director, of high inflation, “and there’s only a fraction of the country that’s gonna pay for it to get it down.” 

“The people who will pay, who feel the pain from the Fed fighting inflation, they are not sitting at the table making the decisions,” she continued.  

Here are three ways Americans could feel the squeeze. 

Workers will lose power and protection 

The Fed’s rapid rate hikes will bring to an end two years of rapid wage growth, record-breaking job openings and remarkably low layoffs.  

The U.S. still added 315,000 jobs in August and wages rose 5.2 percent over the past year, but economists expect job growth to slow and the unemployment rate to rise as businesses feel the squeeze of higher rates.  

That means many workers who’ve not yet gotten raises won’t get one and may have fewer other employment options with better compensation. 

“Whereas in the past, businesses would quickly lay off excess labor at the first hint of a slowdown in activity, the first post-pandemic response is to reduce hiring,” wrote Gregory Daco, chief economist at EY-Pantheon, in an analysis last week. 

Fed officials are hopeful they can slow hiring enough to curb inflation without forcing businesses to layoff employees. Even so, Sahm warned it could take several months for the economy to feel the full weight of the Fed’s actions. The delayed impact means the Fed may move to slow the economy too much and not realize it before it’s too late. 

“When inflation comes down, all of us as consumers benefit for sure. But to get that down, some of us as workers will get hurt,” Sahm explained. 

Sahm added that those most at risk are relatively new hires and groups who often have persistently higher rates of unemployment, including Black Americans, Hispanics, non-college educated workers and those with disabilities. 

“For Black and brown and low wage workers, the pain will be severe from fighting inflation,” Sahm said. 

Harder for businesses to grow and expand 

Small business owners in particular will face serious headwinds as the Fed saps consumer spending from the economy. 

Slower sales and the higher cost of borrowing money may make it difficult—if not impossible—for some firms to not only invest in their workforce, but their physical operations and the equipment they use.  

“While US businesses remain optimistic about the outlook and corporate finances are generally healthy, elevated uncertainty regarding the trajectory of final demand, persistent inflation, market volatility and rising interest rates will lead to more conservative hiring and investment decisions,” Daco wrote. 

Part of that is by design, since the Fed wants to reduce the amount of demand for ever-more-expensive goods and services. But smaller firms and those with high debt loads may face steep obstacles without the power and scale of larger businesses to weather the storm. 

Higher home payments, slower home sales 

Homeowners and buyers will feel the pain of the Fed’s fight against inflation across the housing market as higher interest rates slow sales and force listing prices down. 

The Fed’s rate hikes have caused mortgage rates to nearly double over the past 12 months, hitting 5.89 percent for 30-year loans this week, according to Redfin. The steady climb in rates has pushed the average monthly payment on a median-priced home to $2,337, up 40 percent from $1,664 a year earlier. 

Homeowners looking to sell will likely find fewer offers and may be forced to bring their asking prices down, a sharp break from more than a decade of interrupted home price growth. 

Home-buying interest is down 11 percent over the past 12 months, according to Redfin’s Homebuyer Demand Index, which measures requests for tours and services from the company’s real estate agents. Touring activity as of Sept. 4 was also down 38 percent from the start of the year. 

“The housing market always cools down this time of year, but this year, I expect fall and winter to be especially frigid as sales dry up more than usual,” said Redfin Chief Economist Daryl Fairweather.