To contain rising prices in the greatest economy in the world, the US central bank has raised interest rates to levels not seen in nearly 15 years.
The target range will now be between 3% and 3.25% after the Federal Reserve stated it was increasing its key rate by an additional 0.75 percentage points.
According to the bank, borrowing costs will likely continue to rise. Despite growing worries that a severe economic collapse could result from curbing inflation, action has been taken.
Jerome Powell, the chairman of the Federal Reserve, stated that the rate increases were required to moderate demand, relieve the pressures driving up prices, and prevent long-term harm to the economy. However, he acknowledged that they would have an impact.
Banks have to make similar trade-offs as they hike rates to address their own inflation issues, with the notable exceptions of Japan and China.
At its meeting on Thursday, the Bank of England is set to announce its seventh straight rate increase. Indonesia and the Philippines are among the other nations expected to follow suit.
Analysts are beginning to worry that the rate hikes’ global impact, which affects consumers in the form of more expensive credit card debt, loans, and mortgages, could cause a more severe economic slowdown than anticipated by policymakers.
The world economy is projected to be at its lowest in more than a decade in 2023, with the exception of the 2020 pandemic year, according to Ben May, director of global macro research at Oxford Economics, even if it escapes the two-quarters of decline that normally define a recession.
How much will interest rates increase?
In response to inflation that is at a 40-year high, the Fed is hiking rates in the US at one of the fastest rates in its modern history, marking a significant reversal after years of low borrowing costs.
The Fed had first hoped that the challenges would go away as the supply chain problems caused by the coronavirus outbreak subsided. But the conflict in Ukraine, which hampered the flow of food and oil, made matters worse.
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While oil prices have recently decreased, the economy is currently experiencing widespread inflation pressures. The most recent statistics indicate inflation at 8.3% in August, with notable rises in housing, health care, and educational prices.
Even though wages have increased, they have not kept up, which has harmed household finances.
The fifth consecutive rate rise on Wednesday brings the rate the Fed charges banks to borrow money from near zero at the beginning of the year to 3% for the first time since early 2008.
According to the Fed’s estimations, which were made public on Wednesday, analysts believe it will increase further in 2023, reaching 4.4% by the end of the year, far higher than their previous projections.
Uncertainty looms
Sean V, a New Yorker, said he felt fortunate to have purchased a two-bedroom condo last year before borrowing prices began to rise, locking in a mortgage rate of about 2.6%.
But the 30-year-old works in the home lending sector, which has seen business fall as mortgage rates surpass 6% for the first time since 2008.
In light of the uncertainty, he said he was cutting back on spending and canceling Christmas plans because he feared losing his job “every single day.”
How do higher interest rates lower inflation?
While some inflation is considered good, rapid, sharp price increases make it difficult for people and businesses to plan and limit expenditure, which hurts economic growth and gradually lowers living standards.
Central banks intend to lower demand for expensive things like automobiles, homes, or corporate expansions by increasing borrowing rates for businesses and people. This should lessen the pressures driving up prices.
But it also means reduced economic activity, frequently resulting in job losses and other financial hardships.
Home sales have dropped in the US, where the economy shrank in the first half of the year. An increasing number of businesses have implemented job cuts or hiring freezes, forewarning rising expenses and an impending downturn.
Since consumer spending is the main engine of the US economy, the jobs market in the US has so far not shown many symptoms of slowing down.
However, the Fed has been under increasing pressure. Senator Elizabeth Warren, a well-known progressive, described the Fed’s actions as “excessive” on Wednesday.
