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In an effort to contain rising prices in the greatest economy in the world, the US central bank has announced yet another abnormally large interest rate increase.
The Federal Reserve announced that it would raise its benchmark interest rate by 0.75 percentage points, with a target range of 2.25 to 2.5 percent.
Since March, the bank has increased borrowing prices in an effort to slow the economy and reduce price inflation.
But concerns about the policies sending the US towards recession are growing.
According to recent data, consumer confidence is declining, the housing market is faltering, unemployment claims are rising, and economic activity is contracting for the first time since 2020.
Many anticipate that this week’s official data will reveal that the US economy contracted for the second consecutive quarter. Although it is measured differently in the US, the milestone is seen as a recession in many other nations.
Jerome Powell, the chairman of the Federal Reserve, recognized that the economy was slowing in some areas during a news conference but added that the bank would likely continue hiking interest rates in the months to come despite the dangers by citing current inflation at a 40-year high.
How is inflation combated by boosting interest rate?
By making borrowing more expensive, higher interest rates encourage individuals and businesses to borrow less and spend less, which helps to combat inflation. Theoretically, this should result in decreased demand and gradual price increases, but it also means less economic activity.
However, the International Monetary Fund (IMF) warned this week that the global economy might be teetering on the edge of recession as US growth stagnates and price increases strain families worldwide.
Some businesses in the housing and tech sectors, which enjoyed quick growth in recent years because of low borrowing costs, have already announced job layoffs or slow hiring plans, citing the market shift.
In response to skyrocketing inflation, central banks “truly have no choice” but to raise interest rates, according to economist and IMF director of research Pierre-Olivier Gourinchas.
Read Also: Interest rates increase: What this means for the economy
The European Central Bank issued its first rate increase in 11 years earlier this month, which was unexpectedly significant. Since December, the Bank of England has been raising interest rates, and other nations have followed suit.
The cost of petrol, food, and housing increased last month, pushing up inflation in the US to 9.1 percent. That is the fastest rate since 1981 and significantly higher than the Fed’s 2 percent target.
The Fed increased interest rates to above 15% in an effort to curb price increases at the time, which caused the economy to enter a prolonged recession that lasted more than a year.
The rate the Fed charges banks to borrow will reach a level last seen in 2019, barely beyond where rates were in the months before the pandemic struck in 2020, following Wednesday’s rate increase, which will be the fourth since March.
However, since the 2008 financial crisis, interest rates have not moved beyond 2 percent, and businesses and families have become accustomed to them. Additionally, the Fed is raising rates unusually quickly; Wednesday’s increase was the second consecutive increase of 0.75 percentage points.
By the end of the year, analysts predict that the Fed will increase interest rates to a range of 3 to 4 percent. However, following Mr. Powell’s press conference, financial markets surged in anticipation that the rate of hikes would slow down in the upcoming months.
An employment market that is still adding hundreds of thousands of jobs each month is cited by analysts as evidence that they still believe the US can escape experiencing severe economic pain. Moreover, although growth has slowed, consumer spending, which makes up about 70% of the GDP, has nevertheless maintained steady.
