…
As it struggles to control rising prices in the greatest economy in the world, the US central bank has raised interest rates to their highest level in over 15 years.
The Federal Reserve’s key rate target range will now be between 3% and 3.25%, announcing a further 0.75 percentage point increase.
The bank stated that borrowing costs would likely continue to rise. Despite growing worries that a severe economic collapse may result from attempts to control inflation, action has been taken.
According to Federal Reserve Chairman Jerome Powell, interest rates increases are required to reduce demand, relieve pressure on prices, and prevent long-term harm to the economy. He did admit, though, that they would have an impact.
As they hike rates to address their inflation issues, banks in almost every nation—with the notable exceptions of China and Japan—are forced to make similar trade-offs.
In addition to the Philippines and Indonesia, the Bank of England is anticipated to announce its eighth straight rate hike at its meeting on Thursday.
Analysts are beginning to worry that a more severe economic slowdown than anticipated may result from the worldwide impact of rate hikes, which trickle down to the general public in the form of more expensive mortgages, loans, and credit card debt.
Except for the 2020 pandemic year, the world economy is projected to be at its lowest in more than a decade by 2023, even if it avoids the two-quarters of decline that traditionally define a recession, according to Oxford Economics’ Ben May, director of global macro research.
What will the pace of increase be?
After years of low borrowing costs, the Fed in the US is raising rates at one of the fastest rates in its modern history, a stunning reversal in response to inflation that is at a 40-year high.
Initially, the Fed believed that the challenges would disappear when the coronavirus pandemic-related supply chain problems subsided. However, the Ukraine conflict, which hampered the flow of food and oil, aggravated the situation.
Inflationary forces are currently brewing throughout the economy, although oil prices have recently declined. As measured by the most recent data, inflation was 8.3% in August, with notable rises in housing, healthcare, and education costs.
The inability of wages to keep up with inflation has affected household finances.
The rate the Fed charges banks to borrow money increased by another 1% on Wednesday, making it the fifth consecutive increase. This is the highest rate the Fed has charged banks since early 2008.
According to the Fed’s expectations, which were made public on Wednesday, analysts predict that the unemployment rate will surpass their previous projections and increase to 4.4% by the end of the year before rising again in 2023.
There is a lot of uncertainty
In order to lock in a mortgage rate of about 2.6%, New Yorker Sean V said he felt fortunate to have purchased a two-bedroom condo last year before borrowing rates began to rise.
However, the 30-year-old is employed in the home loan sector, which has seen business fall as mortgage rates cross 6% for the first time since 2008.
He claimed that “every single day,” he worried about losing his work and that he was reducing his expenditures and canceling holiday plans because of the unpredictability.
What are the ways that higher interest rates reduce inflation?
Some inflation is considered to be healthy, but unexpected, sharp price increases make it difficult for businesses and families to plan and limit spending, which hurts economic growth and gradually lowers living standards.
Central banks aim to lower demand for expensive products like automobiles, homes, or corporate expansions by increasing borrowing costs for individuals and firms. This should lessen the pressure on prices.
But it also means that there will be a less economic activity, which usually results in job losses and other financial hardships.
Home sales have decreased, and many businesses have implemented hiring freezes or job cuts in the US, where the economy shrank in the year’s first half. These actions are warning signs of rising expenses and an impending recession.
Read Also: Is the United States heading for a recession?
Consumer spending, the major engine of the US economy, has remained resilient due to the US jobs market’s few indicators of a slowdown.
However, the Fed has been under increasing pressure. The Fed’s actions were deemed “excessive” by famous progressive senator Elizabeth Warren on Wednesday.
Reference:
