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Sunday, June 26, 2022

5 things to know about the Fed’s interest rate hike and how it will affect you

The Federal Reserve is raising interest rates for the third time this year on June 15, 2022, as it seeks to combat inflation at the fastest rate in more than 40 years. The big question is how much will it increase the rates. Before the latest consumer prices report on June 10, most market watchers and economists had expected a 0.5-percentage-point increase. But now, More are forecasting an increase of 0.75 points — the biggest in nearly 30 years. The risk is that higher rates will push the economy into recession, a fear appropriately expressed by the recent fall in the S&P 500 stock index, which is down more than 20% from its peak in January, making it a “bear market”. has been made.

What does all this mean? We asked Brian Blank, a finance scholar who studies how businesses adapt and handle economic downturns, to explain what the Fed is trying to do, whether it can be successful, and what it means for you. Is.

1. What is the Fed doing and why?

The Federal Open Market Committee, the policy-making arm of the Fed, is currently considering how much to raise its benchmark interest rate. The stakes are high for the US economy, consumers and businesses.

In recent weeks, Fed Chair Jerome Powell has indicated that the US central bank will likely increase 0.5 percentage points to a range of 1.25% to 1.5%. But market and Wall Street economists are now expecting a bigger increase of 0.75 points as May consumer price data show inflation has been unexpectedly stubborn. Some Wall Street analysts suggest a 1 percent increase is possible.

Since the latest data for the Consumer Price Index came out on June 10, financial markets have plunged 5% on the prospect of a sharp increase in rates. Investors worry that the Fed may slow the economy too much in its fight to contain inflation, which, if left unchecked, poses serious problems for consumers and companies. A recent poll found that inflation is the biggest problem Americans believe America is facing right now.

2. What is the Fed trying to achieve?

The Federal Reserve has a dual mandate of maximizing employment while keeping prices stable.

Often policymakers must prioritize one or the other. When the economy is weak, inflation usually subsides and the Fed can focus on keeping rates low to encourage investment and boost employment. When the economy is strong, unemployment is usually quite low, and this allows the Fed to focus on controlling inflation.

To do this, the Fed sets short-term interest rates, which in turn help influence long-term rates. For example, when the Fed raises its target short-term rate, it raises the cost of borrowing for banks, which in turn sends them to consumers and businesses in the form of higher rates on long-term loans for homes and cars. Passes high costs.

At the moment, the economy is strong, unemployment is low, and the Fed has been able to focus primarily on reducing inflation. The problem is that inflation, at an annualized rate of 8.6%, is so high that bringing it down may require the highest interest rates in decades, which could substantially weaken the economy.

And so the Fed is trying to execute the so-called soft landing.

3. What is a ‘soft landing’ and is it possible?

A soft landing refers to the way the Fed is attempting to slow inflation — and therefore economic growth — without causing a recession.

To stabilize prices while not hurting jobs, the Fed is expected to raise interest rates sharply in the coming months – and it currently forecasts rates to be at least 1 percent higher by 2023. It has already raised its benchmark rate twice this year. by an aggregate of 0.75 percentage points.

Historically, when the Fed has had to raise rates rapidly, it has been difficult to survive an economic downturn. Can it manage a soft landing this time? Powell has insisted that its policy tools have become more effective since its last inflation battle in the 1980s, making it possible to avert the landing this time. Many economists and other observers remain uncertain. And a recent survey of economists says many anticipate a recession starting next year.

That said, the economy is still relatively strong, and I would say that the prospect of a recession starting next year is still close to the flip of a coin.

4. Is there any way to tell what the Fed might do next?

Every time the Federal Open Market Committee meets, it attempts to communicate what the financial markets plan to do in the future to help them know that they are not surprised.

One piece of guidance that the committee provides about the future is a series of points, with each point representing a particular member’s expectation for interest rates at different points. This “dot plot” has previously indicated that the Fed will raise interest rates by 2% this year and 3% soon.

Given the inflation news since the last meeting, investors are now anticipating an even faster pace of rate hikes and expect the target rate to exceed 3% by 2023. Long-term interest rates, such as US Treasury yields and mortgage rates, are already reflected. This is a rapid change.

And so investors and economists will be watching to see how the Fed’s dot plot changes after announcing its rate decision on June 15, which will determine how quickly committee members can lift interest rates in the coming months. expect.

5. What does this mean for consumers and the economy?

Interest rates represent the cost of borrowing, so when the Fed raises the target rate, it becomes more expensive to borrow money.

At first, banks pay more to borrow money, but then they also charge individuals and businesses more interest, which is why mortgage rates rise accordingly. This is one reason mortgage payments are rising so rapidly in 2022, even as the housing market and prices begin to slow.

When interest rates are high, fewer people can buy homes and fewer businesses can invest in a new factory and hire more workers. As a result, higher interest rates can slow down the growth rate of the economy as a whole, while also curbing inflation.

And it’s not just an issue affecting Americans. Higher interest rates in the US can have a similar effect on the global economy, whether by raising their borrowing costs or increasing the value of the dollar, making American goods more expensive to buy.

But what this ultimately means for consumers and everyone else will depend on whether inflation slows as much as the Fed is predicting.

World Nation News Desk
World Nation News Deskhttps://worldnationnews.com/
World Nation News is a digital news portal website. Which provides important and latest breaking news updates to our audience in an effective and efficient ways, like world’s top stories, entertainment, sports, technology and much more news.
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