The Federal Reserve voted yesterday to raise interest rates for the first time since 2018. Inflation was the main reason for the move.
It’s the start of the high-wire balancing act that Chair Jerome Powell has to do. Lean one way, and high prices could stay high for a long time, taking a bigger bite out of Americans’ wallets. It could slow down too much if you lean one way or the other. Winds that are strong enough to be hurricanes are blowing in all directions.
During this time, what is being done by the Fed?
People call this the “federal funds rate,” and it’s going to go up by a quarter of a point. When the federal funds rate goes up, it sends out a signal to other parts of the economy, which means that interest rates will rise as well. Interest rates go up when the Fed raises them. When this happens, you’ll see rates on things like mortgages, credit cards, and more go up as well.
People and businesses will have to pay more for borrowing money, which will make them less likely to invest and make them more likely to save. That’s what the economy needs right now: people to work. During February, consumer prices rose 7.9 percent a year, which is far more than the Fed’s long-term goal of 2% growth.
There’s a lot of inflation, so a 0.25 percent rate hike isn’t going to help. As many as six times this year, the Fed said it could raise interest rates. This would be to bring inflation down to a level that is more manageable for people.
But there are many risks.
Before long, war broke out in Europe, and then spiralling cases in China’s industrial centres led to lockdowns. The US economy was just about to put the Covid recession behind them. Both of these things could make prices rise and hurt the economy at the same time that the Fed is trying to slow things down. This is what we’ve seen with gas prices in the past.
Experts say the Fed is facing one of its most difficult problems ever because there are so many unknowns. That’s not the case with Jerome Powell, though. He thinks the economy is strong enough to handle these interest rate increases. “The chances of a recession in the next year aren’t very high,” he said yesterday.