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What will another jumbo rate hike from Federal Reserve mean for beleaguered consumers?

The Federal Reserve is expected to raise the interest rate by .75% for the third time

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Wendy Buell prepares to hang an inflation buster product sign at Neighbors Market in North Salt Lake.

Wendy Buell prepares to hang an inflation buster product sign at Neighbors Market in North Salt Lake on Wednesday, Aug. 10, 2022. What will another interest rate hike for the Federal Reserve mean for consumers?

Jeffrey D. Allred, Deseret News

U.S. consumers struggling to keep up with ongoing record-high inflation, driven largely by surging costs for basic necessities, don’t want to hear about any more pain coming their way.

But Federal Reserve Chairman Jerome Powell warned last month that more economic discomfort is on the horizon and is set to take action on that guidance at the monetary body’s meeting on Wednesday.

Why are interest rates still going up?

Powell and the Fed board are expected to levy a .75% increase to its benchmark lending rate on Wednesday, the third straight bump of that size and a series of moves that represent the fastest increases in decades.

Speaking from the Fed’s annual economic symposium in Jackson Hole, Wyoming, in late August, Powell said the slight downtick in U.S. inflation in July fell far short of ample evidence that price increases are truly in a downward cycle. And he warned consumers and business owners to expect more economic challenges in the near term to avoid worse consequences down the road.

“While 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. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

And while the overall annual U.S. inflation rate came in at 8.3% in August, a decline from July’s 8.5% rate and June’s 40-year-high of 9.1%, core price increases that exclude volatile fuel and energy categories rose much faster than expected last month.

How does higher interest impact inflation?

The Fed rate hikes are intended to increase the cost of debt, a way to help cool consumer spending and, ultimately, bring down inflation by addressing demand. And, in some respects, those efforts are bearing fruit.

Last week, mortgage rates crossed the 6% threshold and hit their highest point since 2008, upping the pressure on the U.S. housing market and pricing out even more would-be homebuyers.

Freddie Mac predicts the high rates will continue to temper demand across the U.S. Although home for-sale inventory is rising, it still remains at “inadequate” levels, meaning home price declines will likely continue — but not fall off a cliff.

And, the average interest rate on credit cards hit 17.96% this month, the highest rate since 1996 according to Bankrate.com.

Bankrate senior industry analyst Ted Rossman told MarketWatch that for those carrying credit card debt, this means your rate could fluctuate as a result.

“Rate hikes generally affect new and existing balances,” Rossman said, adding that “most credit cardholders are currently facing rates that are 225 basis points higher than they were just six months ago.”

Is the Fed strategy working?

But, while the cost of a mortgage and accruing consumer debt on a credit card is on the rise, which are just the kind of results the Fed is hoping to see, other consumer trends are offsetting the dampening effect of rate increases.

Those factors include a U.S. job market that continues to run red-hot and still-robust consumer spending.

Employers added 315,000 jobs in August according to the latest U.S. Labor Department report and the national unemployment rate ticked up to 3.7% from a 50-year-low 3.5% in July. Hiring was down from July’s mammoth 526,000 new hires but the August volume is still well above pre-pandemic rates, and job listings still far outnumber the available workers to fill them.

Labor Department data shows eight of 13 retail spending categories rose in August, per CNN. Spending at food and beverage retailers was up 0.5% for the month and has risen by 7.2% over the past year. Sales increased at restaurants and bars as well as car dealerships jumped by 2.8% on the month. Spending on building materials and equipment, clothing and sporting goods also rose.

Are we headed for a recession?

As the Fed convenes on Wednesday, the disjointed economic signals will fuel another big rate boost but Powell noted at the Jackson Hole conclave that “our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook.”

While interest rates on consumer debt look likely to continue their escalation amid further Fed increases, there is also the looming prospect that the strategy could push the U.S. economy into a prolonged economic downturn, aka, recession.

Last week, billionaire CEO Barry Sternlicht told CNBC that the U.S. economy is teetering on the brink of a serious downturn if the Federal Reserve doesn’t pump the brakes on its rate hikes.

Sternlicht said the Fed reacted too slowly when the first signs of inflationary upticks appeared and was now being overly aggressive in an effort to catch up.

“The economy is braking hard,” the chairman and CEO of Starwood Capital Group told CNBC’s “Squawk Box” on Thursday. “If the Fed keeps this up they are going to have a serious recession and people will lose their jobs.”