The Federal Reserve is set to raise interest rates on Wednesday, a measure to combat rising inflation as the U.S. emerges from the pandemic and economic uncertainty following Russia’s invasion of Ukraine. The expected quarter-point increase comes when prices have risen at their fastest pace in 40 years.
Federal Reserve Chairman Jerome Powell said in a congressional hearing earlier this month that he supported raising the federal funds rate by 0.25%. Interest rates have been close to 0% for about two years since the central bank cut rates as Coronavirus pandemic began in March 2020. This will be the first time the central bank has raised the rate since the end of 2018.
Prices have risen 7.9% in the last year. the fastest inflation rate since 1982. Last month, prices rose 0.8%, an acceleration from January. Personal consumption spending, the preferred measure used by the Federal Reserve, showed prices, excluding often volatile food and energy, 5.2% more than a year ago and 0.5% in January .
Although Powell indicated how much he wanted to raise the rate at the March meeting, he did not say how often he saw the Federal Reserve raise rates or in terms of subsequent meetings. Some economists have called for a more aggressive approach, with a 50% rate hike immediately.
“They’re behind the curve,” said Greg McBride, chief financial analyst at Federal Reserve Bankrate.com. “If it had not been for the situation in Ukraine, there is a good chance that they would have come out of the box with a bigger half-point increase.”
The United States and its allies have done just that punitive sanctions in Russian banks, companies and individuals and restricted trade due to its invasion of Ukraine, which added uncertainty as the Central Bank moves to curb rising prices.
“The timing could not be worse for the Federal Reserve, which has been chasing inflation for the first time since the 1980s,” said Grant Thornton’s chief economist Diane Swonk. “The disruptions we are seeing are adding fuel to a well-lit inflation fire that goes far beyond the energy sector and could affect much more of our daily lives.”
Meanwhile, short- and medium-term inflation expectations have risen, according to the latest Federal Reserve Bank of New York survey, reversing the January falls.
How prices continue to soareconomists have raised their predictions about how many times the Fed will raise rates this year, which could be up to seven times.
If the Federal Reserve raises the federal interest rate, the costs of borrowing will increase for consumers. For credit card holders, a first 0.25% increase may be negligible, but multiple rate increases could accumulate over the next year.
“It’s this cumulative effect that should lead you to take action now,” McBride said. “Look for a 0% or other low-rate balance transfer offer that can isolate you from the rate hikes we expect to see.”
Mortgage rates have been rising in recent months in anticipation of rate hikes and inflation. Car loan rates are also expected to rise.
In the event that the Fed is more aggressive with rising interest rates, along with the tightening of the purchasing power of higher costs of goods such as food and gas, Economists have warned that the chances of a recession next year have increased.
But speaking on Friday ahead of the Fed meeting, Treasury Secretary Janet Yellen, who previously chaired the Federal Reserve, said the economy is strong and households are generally in good financial shape. He noted a record job creation and a drop in unemployment. Last month, the unemployment rate reached 3.8%.
“One of the reasons you may be worried about a recession is because you think that monetary policy to reduce inflation can cause it. We’ve seen it a few times in the past, but we’ve also seen episodes where there is a landing. “Yellen said. “I have confidence in the Fed to control inflation without causing a recession.”
- In:
- Jerome Powell
- pandemic
- Inflation
- Federal Reserve
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