Interest Rates Increase:  What this Means for the Economy 

The Federal Reserve of the United States has raised interest rates for the first time in nearly three decades as it intensifies its fight against rising consumer costs. 

The Federal Reserve announced that it would raise its main interest rate by three-quarters of a percentage point, bringing it to a range of 1.5 percent to 1.75 percent. 

The increase is the third since March, following unusually high inflation in the United States last month. 

More hikes are likely, adding to the economy’s uncertainties. 

Officials predict the rate at which the Fed charges banks to borrow to reach 3.4 percent by the end of the year, resulting in higher borrowing rates for mortgages, credit cards, and other loans for the general population. 

As central banks worldwide follow suit, the global economy will undergo a significant shift as businesses and individuals have benefited from years of low borrowing costs. 

Inflation ‘astounds’ 

The Bank of England is anticipated to announce its fifth rate hike since December on Thursday, raising its benchmark rate above 1% for the first time since 2009. 

Brazil, Canada, and Australia have all hiked interest rates, with the European Central Bank indicating that it will do likewise later this summer. 

The Federal Reserve in the United States had hiked rates twice this year, by 0.25 percentage points in March and another half point in May, after slashing rates to stimulate the economy when the epidemic struck in 2020. 

At the time, Federal Reserve Chairman Jerome Powell stated that no further increases were being considered. However, data released on Friday indicated that US inflation rose to 8.6% in May, the highest level since 1981, prompting officials to act more forcefully, according to Mr. Powell, who spoke at a news conference following this week’s meeting. 

Attempting to catch up 

Many analysts believe the Fed is still trying to catch up after Mr. Powell and others dismissed price increases as a one-time problem caused by supply chain concerns last year. Inflation has accelerated due to reasons such as the Ukraine conflict and China’s continued Covid-19 shutdowns. Despite the Fed’s promises to respond, recent polls show that the public expects the crisis to grow. 

Expectations of inflation 

Ignacio Lopez is ready to see inflation tamed. The Boston-based chef has been seeing food prices rise for the past 18 months while he stocks up for his restaurant. According to him, prices for commodities with complex supply chains, such as packaged goods and imported cheese, are particularly under pressure. 

The company has upped its pricing to counteract the costs, but he claims it can’t go too far without losing consumers. As a result, his profits have taken a knock. Moreover, he is concerned that the rate hikes would be ineffective, pointing out that demand remains low due to Covid, which has reduced the after-work gatherings that used to drive his business. 

The Fed last announced a rate hike of this magnitude in 1994. The move, which raises borrowing costs, will likely reduce demand and decrease economic activity, reducing price pressures in theory. However, by acting late and now acting more forcefully to compensate, policymakers risk inducing an economic slowdown, according to Mr. Daco. 

Mr. Powell stated that the US is well prepared to withstand higher interest rates, citing continued strong employment creation. However, according to the Fed’s latest predictions, economic growth will fall to around 1.7 percent this year, a full percentage point lower than anticipated in March. In addition, unemployment, currently at 3.6 percent, is predicted to grow to 3.7 percent by 2024, then to 4.1 percent. 

Officials also omitted a phrase from their end-of-meeting statement – which usually indicates no change – predicting that the labor market would stay robust even as the Fed raised rates. Mr. Powell explained that the exclusion reflected that many factors driving inflation, such as the Ukrainian conflict, are outside the bank’s control. 

Impact on the entire world 

With Wednesday’s increase, the Fed’s lending rate will return to where it was before the epidemic hit in 2020 and remain low by historical standards. =

However, the increases have already had an effect. Higher rates have boosted demand for dollars, propelling the currency up 10% since the beginning of the year and putting pressure on other countries, particularly developing markets with huge amounts of debt in dollars. 

Financial markets in the United States have slid, with the S&P 500 index, which monitors hundreds of the country’s largest corporations, losing a fifth of its value since the beginning of the year, as multinationals warn that inflation and the strengthening of the currency are affecting their profitability. Home sales have also fallen sharply as mortgage rates have risen in lockstep with the Fed. 

According to data released on Wednesday, retail sales also fell last month as individuals spent more at the pump owing to increased gasoline prices and postponed big-ticket purchases like cars. 

Mr. Powell stated that obtaining control of price increases was critical to maintaining economic stability but that success would take time.

Opinions expressed by New York Wire contributors are their own.