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As it fights to control rising prices in the greatest economy in the world, the US central bank has announced another substantial interest rate hike.
The Federal Reserve announced that it would raise its benchmark interest rate by 0.75 percentage points, with a target range of 2.25 percent to 2.5 percent.
Since March, the bank has been increasing borrowing prices in an effort to slow the economy and reduce price inflation. However, there are growing concerns that the actions may cause the US to enter a recession.
Recent studies have shown declining consumer confidence, a slowing property market, rising unemployment claims, and the first drop in business activity since 2020.
Many anticipate that this week’s official data will reveal that the US economy contracted for the second consecutive quarter. Although it is evaluated differently in the US, the milestone is seen as a recession in many other countries.
In a news conference, Federal Reserve Chairman Jerome Powell admitted that the economy was slowing in certain areas but said that the bank would probably continue raising interest rates in the coming months despite the risks, citing inflation at a 40-year high.
How do rising interest rate combat inflation?
By increasing the cost of borrowing, higher interest rates encourage individuals and businesses to borrow less and spend less, which helps to combat inflation. In principle, this should result in decreased demand and gradual price increases, but it also means less economic activity.
Mr. Powell stated such a slowdown was “essential.” He continued, “We don’t want a recession, and we don’t think we have to.
The International Monetary Fund (IMF) cautioned this week that the global economy might be teetering on the edge of recession; however, US growth stagnates, and price increases strain families worldwide.
Some businesses in the tech and housing sectors, which enjoyed quick growth in recent years because of low borrowing costs, have already announced job layoffs or plans to slow hiring, citing the market shift.
According to IMF economist and 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 issued its first rate increase in 11 years earlier this month, which was unexpectedly big. Since December, the Bank of England has been hiking interest rates, and scores of other nations have followed suit.
How high is US inflation?
Due to higher gasoline, food, and housing prices, inflation in the US increased to 9.1 percent last month. That is the fastest rate since 1981 and significantly higher than the Fed’s target 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 for more than a year.
The rate the Fed charges banks to borrow will reach a level last seen in 2019, barely above where rates were in the months before the pandemic struck in 2020, after Wednesday’s rate increase, the fourth since March.
However, since the financial crisis of 2008, interest rates have hardly ever increased above 2 percent, and businesses and individuals have become accustomed to them. Additionally, the Fed is raising rates unusually quickly—the increase Wednesday was the second consecutive increase of 0.75 percentage points.
Mother of three from Arizona says business “fell off a cliff” Thousands of people in the real estate sector have lost their jobs in recent weeks, including Jessica Duran. She claims that in March, as the US central bank began to hike rates, her firm providing loans for potential home buyers in one of the country’s hottest housing markets “fell off a cliff.”
By the end of the year, analysts predict that the Fed will increase interest rates to between 3 and 4 percent. However, following Mr. Powell’s press conference, financial markets surged in anticipation that the rate of hikes would slow down in the coming months.
An employment market that is still adding hundreds of thousands of jobs each month is cited by analysts as evidence that they continue to believe the US can escape experiencing serious economic pain. Moreover, although growth has slowed, consumer spending, which makes up roughly 70% of the GDP, has remained steady.