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The US central bank has announced another abnormally big interest rate increase. Because it fights to control surging prices in the largest economy in the world.
In order to reach its target range of 2.25 percent to 2.5 percent, the Federal Reserve announced that it would raise its key rate by 0.75 percentage points.
In an effort to slow the economy and reduce price inflation, the bank has been increasing borrowing prices since March.
However, concerns are growing that these actions would push the US into a recession.
Recent statistics suggest declining consumer confidence, a slowing property market, growing unemployment claims. It also claims the first drop in business activity since 2020.
Many anticipate that official numbers released this week will reveal that the US economy contracted for the second consecutive quarter.
Many nations see that point as a recession, while the US measures it differently.
Despite the risks, Federal Reserve Chairman Jerome Powell said the bank was likely to keep raising interest rates in the months to come at a press conference. He cited inflation which is currently at a 40-year high, as the reason for this. Powell acknowledged that the economy was slowing in some areas.
How do higher interest rate counteract inflation?
By increasing the cost of borrowing and incentivizing consumers and businesses to borrow less and spend less. Thus, higher interest rates aid in the fight against inflation. Theoretically, this should result in decreased demand and gradual price increases; however, it also signifies a decrease in economic activity.
The International Monetary Fund (IMF) issued a warning this week that the world economy may be teetering on the verge of recession; however, as US growth stagnates and price increases strain families throughout the globe.
Already, some businesses in the tech and housing sectors, which benefited greatly from low borrowing prices in recent years, have announced job layoffs or plans to slow hiring, citing the market shift.
According to economist and IMF director of research Pierre-Olivier Gourinchas, central banks “truly don’t have a choice”. But to raise interest rates as a result of the skyrocketing inflation rate.
The European Central Bank announced an unexpectedly significant rate increase earlier this month—its first in 11 years. Since December, the Bank of England has been hiking interest rates; dozens of other nations have already done the same.
How high is US inflation today?
Due to higher costs for gasoline, food, and housing, inflation in the US increased to 9.1 percent last month. That rate is the highest since 1981 and significantly higher than the Fed’s goal rate of 2 percent.
At the time, efforts to contain price increases prompted the Fed to boost interest rates to above 15%, which sent the economy into a downturn that lasted more than a year.
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With the fourth rate increase since March, the rate the Fed charges banks to borrow will reach more than 2.25 percent on Wednesday. This is a level last seen in 2019, barely above the rates in the months prior to the pandemic’s impact in 2020.
Although, since the financial crisis of 2008, interest rates have hardly ever gone beyond 2%, businesses and households have gotten accustomed to them. Additionally, the Fed is raising rates at an exceptionally rapid rate; the increase on Wednesday was the second increase of 0.75 percentage points in a row.
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By the end of the year, analysts predict the Fed will increase rates to between 3 percent and 4 percent. However, the financial markets increased after Mr. Powell’s press conference on the premise that the rate of hikes might slow down in the upcoming months.
According to analysts, the US can still avoid suffering from a serious economic downturn because the job market is still adding hundreds of thousands of jobs each month. In addition, despite a slowdown in GDP, consumer spending, which makes up about 70% of the economy, has continued to increase.
