US makes huge interest rate rise to tame soaring prices

• The Federal Reserve announced a 0.75 percentage point increase in its key rate, aiming for a range of 2.25 percent to 2.5 percent. Since March, the bank has raised borrowing costs in an attempt to cool the economy and reduce price inflation.
• There are growing concerns that the moves will cause the US to enter a recession. Interest rates are being raised at an unusually rapid pace by the Federal Reserve.
• Inflation in the United States rose to 9.1% last month, higher than the Fed’s 2% target.

The US Federal Reserve has announced another unusually large interest rate hike as it battles to keep the world’s largest economy’s prices under control.

The Federal Reserve announced a 0.75 percentage point increase in its key rate, aiming for a range of 2.25 percent to 2.5 percent.

Since March, the bank has raised borrowing costs in an attempt to cool the economy and reduce price inflation.

However, there are growing concerns that the moves will cause the US to enter a recession.

Recent data show a drop in consumer confidence, a slowing housing market, an increase in jobless claims, and the first contraction in business activity since 2020.

Many economists predict that the US economy will contract for the second quarter in a row.

That milestone is considered a recession in many countries, though it is measured differently in the United States.

Why are prices increasing so rapidly?
The Eurozone raises interest rates for the first time in 11 years.
At a press conference, Federal Reserve Chairman Jerome Powell acknowledged that the economy was slowing in some areas, but said the Fed was likely to keep raising interest rates in the coming months despite the risks, pointing to inflation that is at a 40-year high.

“Without price stability, nothing works in the economy,” he said. “We need to see a decrease in inflation… That is something we cannot avoid.”

How do higher interest rates combat inflation?

Mr Powell stated that a slowdown was “necessary.”

“We’re not attempting a recession, and we don’t believe we need to,” he added.

The International Monetary Fund (IMF) warned this week that the global economy may be on the verge of a recession as US growth slows and price increases squeeze households around the world.

Already, some companies in the technology and housing sectors, which have seen rapid growth in recent years due to low borrowing costs, have announced job cuts or plans to slow hiring, citing the market shift.

However, with inflation so high, central banks “don’t really have a choice” but to raise interest rates, according to International Monetary Fund economist Pierre-Olivier Gourinchas, director of research.

The European Central Bank announced an unexpectedly large rate hike earlier this month, its first in 11 years. Since December, the Bank of England has been raising interest rates, and dozens of other countries have followed suit.

“The majority of central banks are tightening monetary policy,” Mr Gourinchas said. “The big question going forward is how quickly this monetary tightening can bring inflation back to reasonable levels.”

How high is inflation in the United States?
In the United States, inflation rose to 9.1 percent last month, owing to higher prices for gasoline, food, and shelter. That is significantly higher than the Fed’s 2% target and the fastest rate since 1981.

Efforts to contain price increases at the time prompted the Fed to raise interest rates to more than 15%, plunging the economy into a year-long slump.

The fourth rate hike since March will raise the Fed’s borrowing rate to more than 2.25 percent, a level last seen in 2019, just above where rates were in the months before the pandemic hit in 2020.

Businesses and households, on the other hand, have grown accustomed to low interest rates, which have rarely risen above 2% since the 2008 financial crisis. In addition, the Fed is raising rates at an unusually rapid pace, with Wednesday’s increase marking the second 0.75 percentage point increase in a row.

“This is quickly proving to be one of the most aggressive hiking cycles in recent decades,” said Seema Shah, chief strategist at Principal Global Investors.

“It will take a sustained show of strength to combat four-decade-high inflation.”

She claims that her business, which worked on loans for prospective home buyers in one of America’s hottest housing markets, “fell off a cliff” in March, when the Federal Reserve began to raise interest rates.

She wasn’t concerned about finding a new job when her company informed her that it was eliminating her position. However, the 29-year-old claims that dozens of applications and aggressive networking in the weeks since have resulted in nothing.

She is now concerned that she will be out of work for months until the market recovers.

“I feel like I spent two years rejecting job offers and now I’m out on the streets begging,” she says. “I’m concerned about how long the job market and housing market will remain depressed. Thousands of jobs will be lost if this trend continues.”

Analysts predict that the Fed will raise interest rates to between 3% and 4% by the end of the year. Financial markets rose following Mr Powell’s press conference on hopes that the rate of inflation will slow in the coming months.

Analysts believe the United States can avoid severe economic pain, citing a job market that continues to add hundreds of thousands of jobs each month. Consumer spending, which accounts for nearly 70% of the economy, has also held up, albeit at a slower pace.

“Getting it just right so that it cools the economy without tipping it into recession – that’s a difficult proposition even in the most normal of times, and we’re in a very complicated environment right now,” said Madhavi Bokil of Moody’s Investors Service.

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