On Wednesday, the Federal Reserve took action to try and curb inflation by increasing interest rates three-quarters of a percent.
The Federal Open Market Committee, the panel of Fed officials responsible for monetary policy, hiked the central bank’s baseline interest rate range by 0.75 percent to a new span of 3.75 to 4 percent. This is the fourth consecutive 75 basis point hikes issued by the Fed and sixth interest rate increase since March in an effort to slowly normalize rates back to pre-crisis levels.
As the Federal Reserve’s baseline interest rate range affects everything from mortgages to credit cards to other loans. usually When rates go up, spending by households and businesses slows down because they have less money available.
The recent increase in rates by the Federal Reserve will cause more financial hardship for a U.S. economy that is slowing down but still managing to hold on. Some experts believe it is only a matter of time before we experience an economic recession.
The Fed’s recent interest rate hikes have resulted in a decrease in home sales and caused businesses to pull back on investment; two occurrences that could reduce the growth rate of the U.S. economy. Furthermore, higher Fed interest rates also amplify existing economic hardships faced by other countries, any one of which could adversely affect the United States economy as well.
In spite of this, inflation has stayed resolutely high as a result of several factors including a robust U.S. job market which aids consumer spending, and supply shocks like the war in Ukraine raising prices for food and fuel products. According to the personal consumption expenditures price index – which is the Fed’s favored measure of inflation levels – prices have increased by 6.2 percent in simply the last 12 months alone
Some lawmakers, particularly Democrats, have been putting more pressure on the Fed to back off its rate hike campaign because there are worrying signs that a recession might happen soon.
Those who disagree with the Fed’s strategy argue that millions will needlessly become unemployed, as the bank ignores early signs of inflation dropping, and fails to account for lagging interest rate hikes and supply shortages.
For months now, Federal Reserve leaders have been claiming that rates will continue to be driven up until inflation starts decreasing and moving closer towards the bank’s annual target of 2 percent. However, the FOMC released a statement on Wednesday which implied that rate hikes may start happening more slowly in the near future.
FOMC officials stated on Wednesday that several factors will be taken into account when deciding future rate hikes, such as “the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
To put it plainly, Fed officials will take into account how rapidly they’ve already raised rates, how long those hikes might take to alter inflation, and how the economy has answered. Although those are all factors the Fed should mull over ordinarily, their incorporation in Wednesday’s statement is a noteworthy acknowledgment of the risks the bank encounters as it battles inflation.