After the meeting of the Federal Reserve (FED), headed by its head, Jerome Powell, an increase in the interest rate of 0.25% was announced this Wednesday, as predicted by a large number of analysts, in what represents a slowdown in rate increases compared to the latest announcements.
In the statement of the Federal Open Market Committee (FOMC), it is detailed that: “The Committee seeks to achieve maximum employment and inflation at a rate of 2 percent in the long term. In support of these goals, the Committee decided to raise the target range for the federal funds rate from 4-1/2 to 4-3/4 percent. The Committee anticipates that continued increases in the target range will be appropriate to achieve a monetary policy stance that is restrictive enough to return inflation to 2 percent over time.”
The statement from the Federal Open Market Committee (FOMC) details that recent indicators point to moderate growth in spending and production; that job creation has been strong in recent months, with the unemployment rate low; and that although inflation has decreased somewhat, it remains high.
He mentions that Russia’s war against Ukraine continues to cause “tremendous” human and economic hardship and is contributing to global uncertainty.
Jerome Powell’s announcement comes amid inflation, which although it has begun to ease, has remained stubbornly high and at a level not seen in four decades, with the job market strong and consumers spending despite confidence of American consumers is diminishing, in addition to high housing prices, which are also starting to drop, and fears that the country will fall into an economic recession.
The previous FED increases were:
0.5%, December 14, at 4.25%
0.75%, November 2, at 3.75%
0.75%, September 21, at 3%
0.75%, Jul 27, 2.25%
0.75%, June 15, 1.50%
0.5%, May 4, 0.75%
0.25%, on March 16, to 0.25%
The US Bureau of Labor Statistics has reported that year-on-year inflation has seen significant increases throughout the year:
– December, 6.5%
– November, 7.1%
– October: 7.7%
– September: 8.2%
– August: 8.3%
– July: 8.5%
– June: 9.1%
– May: 8.6%
– April: 8.3%
– March: 8.5%
– February: 7.9%
– January: 7.5%
The monetary policy announcement is one of several that have been registered throughout 2022, as part of the “normalization” process of the US economy, which seeks to deal with the strong inflation that in its last report registered 6.5 % year-on-year, which, although it has been the lowest level in the last twelve months, is still high.
The person in charge of monetary policy in the US, Jerome Powell, has recognized that lowering inflation will not be easy, but he assured that it will continue to be a priority to attend to because it affects the economy of the Americans.
According to the central bank, in 2023 there could be more increases in interest rates, to support higher borrowing costs with the intention of curbing demand and achieving a faster-than-expected deceleration in inflation.
The series of rate hikes would increase borrowing costs for consumers and businesses, raising the odds of leading the economy into an economic slowdown and later recession.
Why do interest rates rise?
A rise in rates decreases the availability of credit and makes it more expensive, with which demand decreases. The higher interest charges have a direct impact on people’s pockets, since the consumption of goods, car loans and mortgages tend to increase.
Low interest rates help the economy grow, since they encourage consumption and therefore there is more demand for products. The more products are consumed, the more economic growth, but the downside of keeping rates low is that consumption causes inflationary trends, as has been happening in recent months.
With the rise in rates, the supply of credit can be reduced since a higher interest rate implies a greater risk for the economic recovery of the portfolio and, in response, financial intermediaries react by limiting credit.
This translates into a decrease in demand, since there is a drop in consumption and investment, which results in lower inflation, which is what the FED is looking for.
To the extent that inflation is outside the target range, the Fed is expected to continue raising interest rates, in such a way that it has an impact on consumption and therefore on prices.
The expectation before the announcement of the rise in interest rates is because resorting to them can lead to a blow to the country’s economic growth, which could lead to a recession, given the current conditions of the economy.
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