California Observer

US Makes Biggest Interest Rates Increase in Almost 30 Years

Image Source: Time

The Federal Reserve of the US makes biggest interest rates increase for the first time in nearly three decades.  They did this as part of a push to contain rising consumer prices. The Federal Reserve said that three-quarters of a percentage point would raise its main interest rate from 1.5 percent to 1.75 percent.

The increase is the third since March, followed by an unexpected spike in US inflation last month. More rate hikes are likely, adding to the economy’s unpredictability. Officials predict the rate at which the Fed charges banks to borrow to reach 3.4 percent by the end of the year. This means with higher borrowing costs for mortgages, credit cards, and other loans rippling through to the general population.

As central banks worldwide follow suit, the global economy will undergo a significant shift.  This is happening after years of low borrowing costs for businesses and consumers.

‘Surprise’ inflation – US Makes Biggest Interest Rates Increase

The Bank of England is expected to announce its fifth rate hike since December on Thursday. Thus, pushing its benchmark rate above 1% for the first time since 2009. In the United Kingdom, where consumer prices rose 9% in April, the Bank of England is expected to announce its fifth rate hike.  They were planning since December. Therefore, ultimately pushing its benchmark rate above 1% for the first time since 2009.

Brazil, Canada, and Australia have hiked their interest rates, with the European Central Bank.  This indicates that it will do likewise later this summer.

The Federal Reserve had already lifted rates twice this year, by 0.25 percentage points in March and another half point in May. This happened after slashing rates to stimulate the economy when the epidemic struck in 2020.

Jerome Powell, the chairman of the Federal Reserve, announced at the time that no further increases were being considered. However, data released on Friday revealed that US inflation rose to 8.6% in May, the highest level since 1981, prompting officials to act more forcefully, according to Mr. Powell, who spoke at a press conference after the meeting.

Making up for lost time

Many analysts believe the Fed is still catching up after Mr. Powell and others dismissed price increases last year as a one-time occurrence due to supply chain concerns. Inflation has risen since then due to events such as the Ukraine conflict and China’s continued Covid-19 shutdowns. Despite the Fed’s promises to help, recent polls indicate that the public believes the crisis will grow.

Expected inflation rate

Ignacio Lopez is hoping for a reduction in inflation. But, as he prepares food for his restaurant in Boston, the chef has seen food prices rise for the past 18 months. According to him, prices for things with complex supply chains, such as packaged goods and imported cheese, are particularly vulnerable.

The company has upped its rates to counteract the costs. But he claims it can’t go too high without losing consumers. As a result, his profits haven’t recovered. Moreover, he is concerned that the rate hikes would be ineffective, noting that demand remains low due to Covid.  Thus, it has reduced the after-work gatherings that used to be the lifeblood of his firm.

It was 1994 when the Fed announced a rate hike of this magnitude. The move is expected to cool demand and impede economic activity, alleviating pricing pressures in theory. However, policymakers risk inducing an economic slowdown by acting late and now acting more aggressively to compensate, according to Mr. Daco.

Mr. Powell stated that the United States is well-positioned to handle higher interest rates, citing continued strong job creation as evidence. However, the Fed’s latest predictions show that growth will fall to around 1.7 percent this year, down a full percentage point from March’s forecast. Unemployment, which is currently at 3.6 percent, is anticipated to increase to 3.7 percent by 2024, then to 4.1 percent.

Officials also omitted a sentence from their end-of-meeting statement, which usually indicates no change, stating that the labor market would remain robust even if the Fed hiked rates. Mr. Powell explained that the exclusion reflected the fact that many factors driving inflation are outside the bank’s control, such as the Ukraine conflict.

US Makes Biggest Interest Rates Increase – Effects on the world

With Wednesday’s increase, the Fed’s lending rate will be back to where it was before the pandemic struck in 2020, which is still low by historical standards.

The increases, however, have already had an effect. Higher interest rates have boosted demand for dollars, propelling the currency up 10% since the start of the year and putting pressure on other countries, particularly emerging markets with significant dollar debt.

Financial markets in the United States have slid, with the S&P 500 index, which measures hundreds of the country’s largest companies, losing a fifth of its value since the beginning of the year, as multinationals warn that rising inflation and the strength of the dollar are affecting their profitability. In addition, home sales have slowed dramatically as mortgage rates rise in lockstep with the Fed.

According to data released on Wednesday, retail sales also fell last month as individuals spent more at the pump owing to increased gasoline prices and postponed large-ticket purchases such as cars.

Mr. Powell stated that maintaining price stability was critical and that progress would take time.

Leave a Comment

Your email address will not be published.

Opinions expressed by California Observer contributors are their own.