Federal Reserve raises interest rate by 0.75% in fight against ongoing inflation

Federal Reserve raises interest rate by 0.75% in fight against ongoing inflation

On Wednesday, the Federal Reserve raised its key interest rate by 0.75% for the third straight time as it races to get ahead of the rampant inflation that is sapping gains for American consumers.

In its latest economic forecast, the Federal Open Market Committee said it now projects the US unemployment rate to rise from 3.7% to 4.4% – meaning hundreds of thousands of Americans will be out of a job.

This month, the Bureau of Labor Statistics reported that inflation rose 8.3% year-on-year and 0.1% month-on-month. Both numbers were higher than expected by analysts, raising fears that inflation is consolidating.

The essence of the problem is that demand in the economy is still very high in the midst of a global supply crisis. Thanks to restricted spending during Covid lockdowns and federal stimulus plans, consumers found themselves flush with cash as the economy began to reopen. Meanwhile, Covid supply chain problems persisted and Russia’s invasion of Ukraine decreased access to food and energy in other parts of the world.

So the Fed is looking to bring demand back to the level of supply. By raising interest rates, the Fed hopes to curb consumption and borrowing, which in turn should push prices down. However, this will come at the cost of a slowing economy.

Image: Jerome Powell
Fed Chair Jerome Powell at a June 15 news conference in Washington.Drew Angerer/Getty Images Archive

“The Fed has been delivering a ‘tough love’ message that interest rates will be higher and longer than expected,” wrote Greg McBride of Bankrate.com in a note released Monday. “The Fed will continue to raise rates until it truly tightens the economy and intends to keep rates at those restrictive levels until inflation is unequivocally on track to 2%.”

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Higher rates and the resulting slowdown in the economy are likely to translate into higher unemployment. This week, Deutsche Bank told Bloomberg News that it now projects the U.S. unemployment rate to rise nearly a percentage point to 4.5% — implying that hundreds of thousands of people will be looking for work in the next 12 months. Last month, Fed Chair Jerome Powell gave a speech in which he predicted that outcome, saying the higher rates “would bring some pain to families and businesses”, something he said was “the unfortunate costs of reducing inflation”.

However, the job market remains historically strong, leading others to argue that unemployment doesn’t have to go up that much. In a note to clients on Monday, Goldman Sachs chief economist Jan Hatzius projected that it would take until 2024 for unemployment to reach 4.2%.

“The labor market remains tight and workers continue to benefit from very favorable job search prospects, primarily reflecting the fact that total jobs remain 5.2 million above the total number of workers,” he wrote.

One area where higher interest rates are taking a significant toll is housing. In an email to clients on Monday, Ian Shepherdson, chief economist at research group Pantheon Macroeconomics, said nine consecutive drops in the National Association of Home Builders’ activity and sentiment index indicate that the home market is now into a “deep recession”. As a result, he said, the Fed is unlikely to continue its aggressive bullish pace going forward.

“The longer and deeper the housing recession becomes, the more pressure it will exert on the Fed to ease the pace of tightening,” he wrote.

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Bankrate’s McBride offered some financial advice Americans should keep in mind as interest rates rise.

“Given the environment of rising rates and a slowing economy,” he said, “financial measures for families are increasing emergency savings, paying off high-cost debt and maintaining contributions and a longer-term outlook for retirement. bills.”

Source : www.nbcnews.com

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