Image Source: BBC
As it fights to control rising prices in the biggest economy in the world, the US central bank has announced another exceptionally significant interest rate hike.
The Federal Reserve announced it would raise its benchmark interest rate by 0.75 percentage points, with a 2.25 to 2.5 percent target range as the new range.
The bank has been increasing borrowing prices since March in an effort to slow the economy and reduce price inflation.
But there are growing worries that the changes would plunge the US into a recession.
Recent indicators include a weakening property market, rising unemployment claims, declining consumer confidence, and the first drop in business activity since 2020.
Many anticipate this week’s release of official data to reveal the US economy contracted for the second consecutive quarter.
That milestone is seen as a recession in many nations, even though it is evaluated differently in the US.
Jerome Powell, the chairman of the Federal Reserve, acknowledged that the economy was slowing in some areas during a press conference but added that despite the risks, the bank was likely to continue raising interest rates in the coming months. Powell cited inflation, which is at a 40-year high, as the reason for his statement.
How is fighting inflation achieved by raising interest rate?
Because borrowing is more expensive with higher interest rates, consumers and businesses are compelled to borrow less and spend less, which helps to combat inflation. Theoretically, this should result in decreased demand and gradual price increases, but it also indicates a decline in economic activity.
But the International Monetary Fund (IMF) warned this week that the global economy might be teetering on the verge of recession as US growth stagnates and price increases strain families worldwide.
The tech and housing sectors, which benefited from low borrowing costs in recent years and enjoyed strong growth, have already announced job losses or intentions to slow hiring, citing the changing nature of the industry.
According to IMF economist and director of research Pierre-Olivier Gourinchas, with inflation skyrocketing, central banks “truly don’t have an option” but to raise interest rates.
The European Central Bank just announced its first rate increase in 11 years, which was unexpectedly big. Since December, the Bank of England has increased interest rates, and numerous other nations have followed suit.
Just how high is US inflation?
As a result of rising gas, food, and housing prices, inflation in the US increased to 9.1 percent last month. That is the fastest rate since 1981, and much exceeds the Fed’s target rate of 2 percent.
In an effort to contain price increases at the time, the Fed increased interest rates to over 15%, which caused the economy to experience a longer-than-expected fall.
The rate that the Fed charges banks to borrow will increase by one percentage point on Wednesday, marking the fourth increase since March. This will bring the rate to over 2.25 percent, last seen in 2019, just above the rates that prevailed in the months prior to the pandemic’s impact in 2020.
But since the financial crisis of 2008, interest rates have seldom ever risen beyond 2 percent, and businesses and people have become accustomed to them. Additionally, the rate of hikes by the Fed is highly rapid; the increase on Wednesday was the second consecutive increase of 0.75 percentage points.
Analysts predict that before the end of the year, the Fed will increase interest rates to a range of 3 and 4 percent. However, after Mr. Powell’s press conference, stock markets rose in anticipation that the rising rate would slow down in the coming months.
With a labor market that is still adding hundreds of thousands of jobs each month, analysts claim they are still optimistic that the US can escape experiencing significant economic hardship. Moreover, even while economic growth has slowed, consumer spending, which makes up over 70% of the GDP, has continued to hold steady.
