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'This is probably not the time to borrow': UK economy professor reacts to Fed rate hike

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Posted at 7:00 PM, Jun 16, 2022
and last updated 2022-06-16 19:00:15-04

LEXINGTON, Ky. (LEX 18) — For months we’ve been paying more, in some cases a lot more, for groceries, gasoline, and many of our other essentials. Now there’s a new price hike to consider as the Federal Reserve enacted the largest interest rate increase in 18 years.

The central bank increased the rate by ¾ of a percent on Wednesday, which means originating loans for home and car purchases, even student loans, will cost the consumer more. Those with variable-rate credit cards are certain to feel the pinch too.

“I have a credit card with the bank, there isn’t much on it, but they charge so much interest I’m going to take it back to them. I won’t use it because the rate is outrageous,” said Ron Wylie, as he was leaving the grocery store on Thursday in Lexington.

The rate hike is meant to curtail spending. We’ve been spending a lot since pandemic restrictions ended, and that has played a role in causing the prices to soar. But that’s not the only factor.

“Really since 2018 we began to see issues with the supply chain, in part because of trade policies, and with COVID because of the pandemic,” said Dr. Chris Bollinger an economic professor at the University of Kentucky.

“We began to see our supply chain breaking down, so that causes inflation too,” he continued, before adding the price of gas to the equation, due in part to the war in Ukraine.

Dr. Bollinger said homeowners who were able to lock in a rate before this increase should be thankful, and that they should not consider refinancing even for the purpose of cashing out home equity. He also said a Home Equity Line of Credit (HELOC), which doesn’t require a refinance, isn’t a great idea given those rates will now be higher too. But he did say now might be the time to invest in stocks, given the markets have been tumbling.

“I don’t know if this is the bottom, but maybe this is the time to buy because it is pretty low,” he said.

Dr. Bollinger cautioned against investing money you can’t live without no matter how low the stock prices drop.

“Because if you need that money in the medium or long-term you might have to sell low” (to get it out), he said.

The action taken by the Federal Reserve on Wednesday seemed to be inevitable for the last several months.

“They’ve been pumping the brakes for over a year now, and now they said, ‘oh my God.’ Now they’re really stepping on them hard,” Dr. Bollinger explained.

He didn’t seem concerned about the consequence of the rate hike for those who are paying down student loans, as most of those products are offered at a fixed rate. But he had a message for anyone thinking about a new home, or auto loan now.

“If you haven’t borrowed yet, this is probably not the time to borrow,” he said.

Home loan interest rates, for example, which were in the 3% range earlier this year, have nearly doubled. The effect of the rate hike will likely cool down what had been a sizzling seller’s market, as lower interest rates allowed some buyers to scoop up higher-priced homes that might normally have been out of their reach.