The news of the Federal Reserve, the central bank of the United States, hiking interest rates again has sent ripples around the world. The bank has also stated that further interest hikes are necessary to combat inflation. In its latest reports, the Federal Reserve has also estimated that the key interest rates of the bank may cross 5% in a year. The inflation levels now are being regarded as the highest in over a decade, and the unsure economic scenario has caused the US stock market to remain volatile.
Given the current global economic scenario, policymakers are treading with caution and have decided to increase the key interest rates by 0.5 percentage points. This has led to an increase in the target range of the Federal Reserve’s benchmark rate. The range is now 4.25%-4.5% and is the highest in 15 years. This, however, was a lower increase than was mentioned in some recent announcements. According to a statement by the Chairman of the Federal Reserve, this was done to slowly observe how the economy was responding to the hikes and the resultant rise in mortgage costs and costs of other loans and credit card debts. However, he also said in the same statement that this rise was still very high compared to the past hikes, and more interest rate changes may be on the way.
This move by the US central bank has increased borrowing costs around the world. By increasing borrowing costs, the Federal Reserve and other global bodies are trying to lower economic activity and reduce the pressures driving the prices up. However, these moves also pose the risk of a downturn in the economy.
The status of inflation
This rise was the 7th interest rate hike announced by the Federal Reserve this year. This is being done to control inflation, which remains the highest in nearly four decades. It reached the 9.1% mark in June but has come down after that. The increase in consumer prices over 12 months has also gone down from 7.7% in October to 7.1% in November. While these are indications that the inflation scenario is improving, the banks need more proof that it is indeed on a downward trajectory.
Federal Reserve projections
According to Federal Reserve projections, experts expect the US economy to grow by 0.5% next year. This figure is a lot lower than the historical values. Also, the unemployment rate is expected to rise to 4.6%, and this, combined with low growth, remains a cause of concern. Policymakers expect a decrease in inflation rates but forecast it to be above 3% in 2025. The bank’s target, however, is 2%; thus, the Federal Reserve was grim about the foreseeable future of inflation. The US stock market will also likely be a victim of uncertainty in the coming months.
There are speculations that the broader economy will weaken due to these measures. The Federal Reserve has said that their present area of focus is inflation because, if not controlled, it will damage the economy more.
The multiple interest rate hikes by the US central bank have increased market volatility. The road ahead still looks rocky, and financial markets are still waiting for the inevitable peak and what will follow the peak. The news that interest rates may not go down till 2024 has left many disappointed. However, as per the Federal Reserve, these hikes are required to curb inflation and support the economy in the long run.