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Interest rates and inflation

In an effort to get the nation’s post-pandemic inflation under control, the Fed embarked on an aggressive rate hiking campaign — raising interest rates 11 times since March 2022, from 0.25% to 5.5%.

The idea was to try and temper demand for consumer goods and services by making it more expensive to borrow money. In theory, if goods and services grow too expensive, less people will buy them and sellers will have to lower their prices — reducing inflation.

Those rate hikes, while painful for the average American’s pocket book, have brought inflation down to 3.7% for the past two months, from a high of 9.1% in June 2022.

But that is still well above the Fed’s 2% annualized inflation target — a goal they don’t expect to hit until at least 2025. As a result, the Fed has signaled that interest rates will remain higher for longer as they seek a “soft landing” for the economy.

Schiff sees that unclear narrative as a failure. In a separate post on X, he wrote: “Today's .4% rise in Sept. CPI, including a .3% rise in core, further confirms that the Fed is nowhere near achieving its 2% annualized inflation target … When will investors finally figure out that the inflation war has been lost?”

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Zero interest rate policy (ZIRP) impact

A soft landing is a slowdown in economic growth that avoids a recession. This would potentially enable the Fed to avoid ZIRP, a monetary policy it turned to for seven years after the Great Recession of 2007-8 and again during the COVID-19 pandemic.

ZIRP is designed to stimulate economic activity by encouraging low-cost borrowing and greater access to cheap credit for individuals and businesses. But Schiff believes a return to ZIRP today would have severely detrimental effects on the economy.

His bold claims are not entirely unfounded. While increased money supply and a lower cost of borrowing can spur on economic growth by encouraging people to borrow for big-ticket items like homes and cars, it could also lead to price increases (aka, inflation) if the supply of goods and services cannot keep up with heightened consumer demand.

ZIRP could also have an impact on investors. It typically pushes them away from traditional interest-bearing assets like savings accounts or bonds and towards riskier investments like stocks. This can trigger a boom in the stock market, potentially creating a wealth effect that can fuel inflation.

Finally, as for Schiff’s “implosion in the dollar” claim, ZIRP could potentially make the U.S. currency less attractive to foreign investors, which could technically lead to depreciation of the dollar.

But remember, all of these factors are merely potential consequences of ZIRP and are not necessarily guaranteed, as Schiff suggests.

What 'much higher, forever' rates could mean for you

Schiff is adamant that interest rates will remain “much higher, forever.” If that gloomy projection turns out to be true, here’s how it might impact your finances — and what you can do about it.

Elevated interest rates can make it much more expensive to borrow money via a mortgage, a car loan, credit cards, a home equity line of credit (HELOC) or other personal loans.

If you can’t keep up with your monthly payments, you could end up paying interest on your interest, and your debt can quickly spiral out of control — forcing you into delinquency or default and damaging your credit score.

On a macro level, when interest rates and borrowing costs are high, this can lead to reduced economic activity, as people are less likely to make big purchases like homes and cars and they have less available cash to spend on everyday essentials. It can also lead to job losses as companies review their staffing and pull back on spending.

That all sounds rather bleak, but there are ways to mitigate the impacts of this monetary policy. For instance, you can stash some money in a high-yield savings account or a certificate of deposit (CD) to make the most of the high rates.

You could also adapt your investing strategy toward alternative assets — such as real estate — that can help to hedge your portfolio against inflation.

Higher for longer interest rates can increase the value of your savings and investments (depending on your investment choices), which is particularly beneficial for those planning for retirement.

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Bethan Moorcraft is a reporter for Moneywise with experience in news editing and business reporting across international markets.

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