As Federal Reserve continues to raise interest rate, here's what you should know about its impact on Arizonans

The U.S. is still dealing with inflation that has reached a high not seen in decades, and in response, the Feds are raising interest rates in an attempt to combat the problem.

Here's what you should know about inflation's impact on Arizonans, as well as the potential impact of higher interest rates..

How did inflation get so bad?

By its own admission, the central bank underestimated the breadth and persistence of high inflation after the pandemic struck.

Since its meeting in January, the challenges and uncertainties for the Fed have escalated. Russia's invasion of Ukraine has magnified the cost of oil, gas, wheat and other commodities. Meanwhile, China has closed ports and factories again to try to contain a new outbreak of COVID, which will worsen supply chain disruptions and likely further fuel price pressures.

Didn't the Feds raise interest rates?

The Federal Reserve's decision on March 16 to raise interest rates by a quarter of a percent marks the start of its effort to curb the high inflation that followed the recovery from the recession. That interest rate hike was followed by a decision on May 4 to raise interest rates by half a percent, meaning the Fed's key short-term rate now stands at a range of 0.75% to 1%.

Up until March, the interest rate has been near zero as a result of a recession that was, at least in part, induced by COVID-19, and most economists say that sharply higher rates are long overdue to combat the escalation of inflation across the economy.

How many times will they raise interest rates this year?

During a news conference on May 4, Federal Reserve Chair Jerome Powell made clear that further large rate hikes are coming.

Powell said that additional half-point increases in the Fed's key rate "should be on the table in the next couple of meetings" in June and July. Powell also downplayed any speculation the Feds might consider 0.75% interest rate hikes.

How will raising the interest rate actually deal with inflation?

According to the Federal Reserve Bank of Cleveland, which is one of the component members of the Federal Reserve System, the Federal Reserve sees an annual inflation rate of 2% as the right amount of inflation, and they seek to control inflation with interest rates: raising them to slow the economy and bring inflation down, and lowering them to stimulate the economy when inflation is too low.

What else are the Feds doing to lower inflation?

Officials with the Feds say starting June 1, they would allow up to $48 billion in bonds to mature without replacing them, a pace that would reach $95 billion by September.

At September's pace, its balance sheet would shrink by about $1 trillion a year.

The balance sheet more than doubled after the pandemic recession hit as the Fed bought trillions in bonds to try to hold down long-term borrowing rates.

Why not 0% inflation?

Officials with the Federal Reserve Bank of Cleveland say most central banks, including the Federal Reserve, do not aim to have zero inflation, as a modest amount of inflation will help buffer the economy from falling into deflation, or a decrease in price that could cause just as many economic problems, if not more.

What are some of the challenges the Feds are facing?

Some economists warn that some of the factors fueling inflation — notably, shortages of supplies and workers — are outside the Fed's ability to solve.

"The Fed can’t fix supply-side challenges with higher interest rates,’’ said Jim Baird, chief investment officer at Plante Moran Financial Advisors. "Fed tightening doesn’t re-open Chinese factories, increase grain shipments from Ukraine, re-position container ships to where they are needed or hire truckers to move goods.’’

How is high inflation affecting people in Arizona?

Besides paying more for various goods and services, high inflation is affecting renters.

According to figures, consumer prices in Phoenix rose 10.9% in March. The area's inflation is tracked every other month.

"The data is always backwards looking, so the data is just basically confirming what we already know, as consumers, what is happening," said economist Danny Court. "We’re starting to see surcharges, gas and fuel surcharges added to the price of good and services that are already expensive."

Court believes gas prices will have the largest dent in people's lives.

"That has a ripple effect that we haven’t quite fully covered," said Court. "It’s affecting manufacturers. Anything that uses fuel."

Arizona State University Economist Dennis Hoffman says housing is also a factor.

"All these people want to move here, it creates this immediate excess demand for housing," said Hoffman. "So housing prices skyrocket quickly, that translates to rent."

"I struggle on a daily basis," said Lauri Gutmann, who rents a two-bedroom, 600 sq. ft. apartment in Phoenix. "I work hard, but while I’m working, in the back of my mind, I’m thinking what am I going to do?"

Gutmann said she and her son will have to move, as rent for their apartment, which stood at $970, is rising by $700.

"I'm a single mom, and I have only me to count on," said Gutmann. "I don’t have two salaries. I have just my salary. How am I supposed to afford these crazy rents? It’s unbelievable."

Certain core goods, according to Hoffman, remained stagnant, which could be a sign of slowing inflation.

How did Phoenix's housing market get so hot?

According to realtor.com, the median home prices in Phoenix is $450,000, and in Scottsdale, that number stands at nearly $850,000. 

Sullivan said for years, Phoenix has been an undervalued market, and it was only a matter of time before prices went up. He said raising the interest rate could help lower demand for houses, but not substantially, especially considering the amount of new jobs available in the Phoenix area.

What about people who are buying houses?

Experts say some people are already having to settle for smaller houses in cheaper areas, because housing prices have gone up so much in some parts of the country, including Phoenix.

With higher interest rates, it could make things that much harder for buyers to get a decent home.

"We're in unprecedented uncharted waters for the first time in a long time," said loan originator Ian Sullivan. "The Fed has to raise interest rates to combat inflation, and unfortunately, now it's going to kick out a lot of first-time homebuyers: people that make a good living, have decent credit, and they can't get under contract because the homes are appreciating faster than they can save, and the interest rates are eating into their debt-to-income ratio."

Potential buyer Vince Moody says he has been dealing with just that.

"I initially went got my pre-qualification, thought it was good," said Moody. "Then, I have to go back and look for more money to borrow."

Jeremy Schachter with Fairway Independent Mortgage said these days, he is part therapist managing anxious homebuyers. He said the interest rate hike on May 4 will push people out of the homebuying market.

"Unfortnately, there are going to be a lot of buyers that can't qualify, period," said Schachter.

What should people do?

Sullivan still advises people to buy sooner rather than later. 

"Time in the market is beneficial to the investor, and that's what this is. It is an investment," said Sullivan.

Sullivan also said a lot of people who are currently in starter homes might need to stay there for a bit longer, until they can save more money.

For some renters, like Gutmann, times are set to remain tuff.

"If I don't find another place to move into by July 22, I am going to be homeless," said Gutmann.

The Associated Press (AP) contributed to this report.

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