Image Source: CNN
As it struggles to contain skyrocketing prices in the biggest economy on earth, the US central bank has raised interest rates to their highest level in over 15 years.
The target range will now be between 3% and 3.25% after the Federal Reserve announced an additional 0.75 percentage point increase to its benchmark rate.
The bank predicted that borrowing costs would continue to rise and be high. The action is being taken amid growing worries that the price of managing inflation may be a severe economic downturn.
In order to reduce the pressures driving up prices and prevent long-term harm to the economy, Federal Reserve Chairman Jerome Powell said the rate increases were required to slow demand. But he admitted that they would have an impact.
Banks worldwide are having to make similar decisions as they hike rates to address their inflation issues, with the notable exceptions of China and Japan.
At its meeting on Thursday, the Bank of England is anticipated to announce its eighth straight rate hike, while other nations with hikes include Indonesia and the Philippines.
Analysts are beginning to worry that the rate hikes’ global impact, which affects the general population by making credit cards, loans, and mortgages more expensive, could cause a more severe economic slowdown than anticipated by policymakers.
The world economy is predicted 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 generally define a recession.
Which direction will interest rates move?
In response to inflation at a 40-year high, the Fed is hiking interest rates in the US at one of the fastest rates in its modern history, marking a significant reversal after years of low borrowing costs.
When the supply chain concerns related to the coronavirus epidemic subsided, the Fed initially hoped that the challenges would go away. But the Ukraine conflict worsened matters, which hampered food and oil flow.
Even though oil prices have recently decreased, the economy is now experiencing rising inflation pressures. According to the most recent statistics, inflation reached 8.3% in August, with considerable rises in the price of housing, health care, and education.
Despite wage growth, inflation has impacted household finances.
The rate that the Fed costs banks to borrow money increased on Wednesday for the fifth time in a row, from nearly zero at the beginning of the year to 3% for the first time since early 2008.
According to the Fed’s expectations, which were made public on Wednesday, the rate is expected to grow to 4.4% by the end of the year and further in 2023, significantly higher than its previous projections.
Uncertainty looms heaving
New Yorker Sean V expressed his gratitude for purchasing a two-bedroom condo last year before borrowing costs began to rise and locking in a mortgage rate of about 2.6%.
The 30-year-old, however, is employed in the home loan sector, where business has decreased as mortgage rates have been above 6% for the first time since 2008.
In light of the uncertainty, he said he was reducing his expenditures and canceling Christmas plans because he feared losing his job “every single day.”
While a certain amount of inflation is considered beneficial, rapid, sharp price increases make it difficult for firms and families to plan and limit spending, which hurts economic growth and gradually lowers living standards.
Central banks intend to decrease demand for expensive things like automobiles, homes, or corporate expansions by increasing borrowing costs for businesses and people. This should lessen the pressures driving up prices.
However, it also means reduced economic activity, frequently resulting in job losses and other financial hardships.
Read Also: Is the United States in recession?
Home sales have dropped in the US, where the economy shrank in the first half of the year, and many businesses have implemented job cuts or hiring freezes, signaling an impending slowdown and rising expenses.
Consumer spending, the major engine of the US economy, is now resilient since the jobs market in the US hasn’t shown many symptoms of slowing down.
The Fed is under increasing pressure, though. Leading progressive senator Elizabeth Warren referred to the Fed’s actions as “excessive” on Wednesday.