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Tuesday, May 24, 2022

Federal Reserve plans to raise interest rates as soon as March to cool inflation

WASHINGTON — The Federal Reserve signaled Wednesday that it plans to begin raising its benchmark interest rate as soon as March, a key step in reversing its pandemic-era low-rate policies that have fueled hiring and growth but also escalated inflation.

With high inflation squeezing consumers and businesses and falling unemployment steadily, the Fed also said it would phase out its monthly bond purchases, which have been intended to lower longer-term rates, in March.

The Fed’s actions are sure to make a wide range of borrowing — from mortgages and credit cards to auto loans and corporate credit — costlier over time. Those higher borrowing costs, in turn, could slow consumer spending and hiring. The gravest risk is that the Fed’s abandonment of low rates could trigger another recession.

The central bank’s latest policy statement follows dizzying gyrations in the stock market as investors have been gripped by fear and uncertainty over just how fast and far the Fed will go to reverse its low-rate policies, which have nurtured the economy and the markets for years . The broad S&P 500 index fell nearly 10% this month before rebounding slightly Wednesday.

High inflation has also become a serious political threat to President Joe Biden and congressional Democrats, with Republicans pointing to rising prices as one of their principal lines of attack as they look toward the November elections.

Yet Biden said last week that it was “appropriate” for Chair Jerome Powell to adjust the Fed’s policies. And congressional Republicans have endorsed Powell’s plans to raise rates, providing the Fed with rare bipartisan support for tightening credit.

A separate potential source of higher rates is the Fed’s plans for its bond holdings, which are at a record high of nearly $9 trillion. The bond purchases, which the Fed financed by creating money, have been intended to reduce longer-term interest rates to spur borrowing and spending. Many investors also saw the bond-buying as helping fuel stock market gains by pouring cash into the financial system.

Earlier this month, minutes of the Fed’s December meeting revealed that the central bank was considering reducing its bond holdings by not replacing bonds that mature — a more aggressive step than merely ending its purchases. The impact of reducing the Fed’s bond stockpile isnt well known. But the last time that the Fed raised rates and reduced its balance sheet simultaneously was in 2018. The S&P 500 stock index fell 20% in three months.

World Nation News Deskhttps://www.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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