In an effort to quell stubborn inflation, the US Federal Reserve recently hiked interest rates by another three-quarters of a percentage point and indicated they will continue to rise well above current levels.
This is the fifth and probably not the last rate hike of the year.
The Fed raised its federal funds rate to a range of 3-3.25%, the highest level since early 2008, after the third straight move of 0.75 percentage points.
As interest rates rise, so do borrowing costs. This means that interest rates on mortgages, credit cards and loans will increase, affecting millions of people around the world.
Fed Chair Jerome Powell said: “We are fully committed to bringing inflation down to 2% and we will hold on until the job is done.”
Analysts therefore expect interest rates to rise by at least 1.25 percentage points at the next two scheduled Fed meetings this year.
In August, U.S. inflation rose to 8.3% year on year, although it was down slightly from 8.5% in July and a record high of 9.1% in June, according to the Bureau of Labor Statistics.
With inflation hitting record highs, the Fed is obviously under a lot of pressure from politicians and consumers to get the situation under control. One of the Fed’s main goals is to promote price stability and keep inflation at a rate of 2%.
By raising interest rates, the Fed wants to slow down the economy by making borrowing more expensive. In turn, consumers discourage investors and businesses from making investments and purchases on credit, leading to lower economic demand, theoretically driving up prices and balancing supply and demand.
Some analysts believe the fight against inflation could plunge the US economy – the world’s largest – into recession. This can lead to possible layoffs and a rise in unemployment.
But there’s some opinion that the US economy isn’t looking all that bad. Some analysts are pointing out that US job growth remains strong and many measures of economic activity are growing — albeit at a slower pace than last year.
Oil and food prices have fallen at the wholesale level and consumers are starting to see the results in stores. Gasoline prices fell below $4 a gallon in August.
Consumer spending remains positive as consumers continue to spend the massive savings accumulated during the pandemic, they cite.
Following the Fed’s rate hike, the dollar hit a new two-decade high against a basket of currencies, gaining more than 1%. The strength of the US currency – up more than 16% year-to-date – has raised concerns among central banks around the world about possible exchange rate and other financial shocks.
As the world economy is interconnected, millions of people around the world have been feeling the sting of inflation together for months. Efforts by the Fed and other central banks around the world to tame inflation have so far yielded no positive results.