Hike rates

Fed rate hike: The Fed will sharply hike rates by half a percent to keep inflation under control

After the last Fed meeting on Wednesday, the US central bank decided to take what is said to be one of its most drastic measures in 3 decades to fight inflation. The Federal Reserve plans to beat inflation by making borrowing more expensive.

Inflation rates hit a new 40-year high, forcing the Fed to act aggressively. The plan is to slow down the rate of spending, which includes money for a car, house, credit cards, and any business transaction, all of which put financial pressure on the US economy.

The Fed will likely raise interest rates by half a percent. The Fed’s rate hike will be the largest since 2000 and the second of seven planned hikes this year. Economists also forecast possibilities for another half-point hike in June, July and beyond.

With more job openings this year, the Fed also began raising prices in March. The prediction was that a steady rise in rates would reduce inflation and help cool the economy. The move was meant to help the overall economy stabilize after the coronavirus pandemic.

How effective will this step be?

  • This stage can go haywire if inflation rates rise instead of fall.
  • Policymakers need to move slowly and steadily or rates will rise too quickly to understand.
  • This can lead companies to lay off employees and send the country into recession.
  • It is even more critical to avoid any risk of this happening, as the war between Russia and Ukraine has already fostered the possibility of a recession.
  • No one knows how high a bank’s short-term interest rates need to rise before it can contain inflation. Nor can they talk about balancing the Fed’s $9 trillion balance sheet.

On April 21, Fed Chairman Jerome H. Powell told a panel hosted by the International Monetary Fund that to fight inflation, their goal was to synchronize supply and demand.

He also added that no one at the Fed would say it would be easy. Powell said economies don’t work without price stability but require a stable and robust labor market for a long time.

Powell thinks higher interest rates could help. However, not everyone agrees with this.

How will this price increase affect the government?

  • There were almost 1.7 million jobs this year. The expense rate is high and salaries are also increasing. At the start of the pandemic, the Biden administration might have called such progress hard to imagine.
  • However, if prices for clothing and utilities, including card transactions and housing bills, continue to rise, the effect will be visible in the public’s response.
  • The blanket response may make it harder for the Biden government to muster support.

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