Inflation usually makes the Fed hike interest rates. Here’s what that means

SALT LAKE CITY — As inflation rises, the Federal Reserve says it will start tapering, then raising interest rates next year.

State Rep. Robert Spendlove, R-Salt Lake City, who is also an economist with Zions Bank, breaks down how the Fed’s actions might impact your wallet.

Because of supply-and-demand imbalances brought on by the pandemic and the reopening of the economy, inflation is rising. To combat this, the Fed is beginning to taper — or buy fewer bonds.

“Over the last year, the Fed has been buying $120 billion of bonds per month, mostly Treasury securities and mortgage-backed securities,” Spendlove told KSL Newsradio’s Inside Sources.

Spendlove says the Fed has two ways to influence the economy: slow it down or speed it up. Raising interest rates slows the inflated or overheated economy. Buying bonds is the economic gas pedal.

The Fed will take its foot off the gas, buying much fewer bonds. About half what it was buying before, to be precise. You can count on seeing $60 billion in bonds purchased each month starting in January.

Interest rates to rise — thanks to inflation

Projections released last week indicate that the Fed might have as many as three rate hikes coming in 2022, CNBC reports.

“As those interest rates start to go up, it’s gonna have an impact, especially on the tech sector because it will make it more expensive for those startups to expand,” Spendlove said.

“What are some of the practical impacts of whether it’s the tapering — foot off the gas — or whether it’s the interest rate going up with the tap on the brake?” host of Inside Sources, Boyd Matheson, asked.

“By increasing interest rates,  it’d be more expensive to finance things that we want to buy,” Spendlove said. “It’s going to make financing a home more expensive, financing a car more expensive. The goal is, all else equal, it should force those prices to drop because the cost of financing is higher.”

Don’t fight the Fed

The Fed sends messages to the public with interest rates.

If the interest rates are low, the message is you should not save money but spend money.

“When [the Fed] start raising interest rates, they’re shifting that message, and they’re saying, ‘OK, rather than spending money, you should save more money,” he said.

The Fed wants to slow economic growth just enough without creating a recession.

Inside Sources with Boyd Matheson can be heard weekdays from 1 p.m. to 3 p.m. on KSL NewsRadio. Users can find the show on the KSL NewsRadio website and app.