US interest rates hit 14-year high amid economic downturn

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Image Source: CNN

To contain rising prices in the greatest economy in the world, the US central bank has raised interest rates to levels not seen in 14 years.

The goal range will now be between 3% and 3.25%, according to a Federal Reserve announcement that it would increase its key rate by an additional 0.75 percentage points.

According to the bank, borrowing rates will likely continue to rise and will likely be high. Despite growing worries that a severe economic downturn could result from curbing inflation, the action is nonetheless taken.

Jerome Powell, the chairman of the Federal Reserve, stated that the rate increases were required to moderate demand, relieve pressures driving up prices, and prevent long-term harm to the economy. He did, however, admit that they would have an impact.

Banks are dealing with similar trade-offs as they hike rates to address their own inflation issues, with the notable exceptions of Japan and China.

At its meeting on Thursday, the Bank of England is anticipated to announce its seventh straight rate increase. Indonesia and the Philippines are among the other nations anticipating increases.

Analysts are beginning to worry that the interest rates increases’ global reach, which affects consumers in the form of more expensive credit card debt, loans, and mortgages, could cause a more severe economic slowdown than anticipated by policymakers.

According to Ben May, head of global macro research at Oxford Economics, the world economy in 2023 is predicted to be at its lowest in more than a decade, except for the 2020 pandemic year, even if it escapes the two-quarters of contraction that traditionally define a recession.

What percentage will interest rates rise?

In the US, the Fed is responding to inflation that is running at a 40-year high by raising rates at one of the fastest rates in its modern history, a significant reversal after years of low borrowing costs.

The Federal Reserve first believed that the challenges would go away as the supply chain problems caused by the coronavirus outbreak subsided. However, the conflict in Ukraine, which hampered the flow of food and oil, worsened matters.

Although oil prices have declined, the economy is experiencing widespread inflation pressures. According to the most current statistics, inflation was 8.3% in August and expenditures for housing, health care, and education all saw large rises.

While wages have increased, they have not kept up, which has affected family budgets.

Since early 2008, the rate the Fed charges banks to borrow money has increased five times in a row, from nearly zero at the beginning of the year to 3% on Wednesday.

According to the Fed’s forecasts, which were made public on Wednesday, analysts predict that it will increase further in 2023, reaching 4.4% by the end of the year, far higher than their previous projections.

Uncertainty looms large

Sean V, a New Yorker, said he felt fortunate to have purchased a two-bedroom condo last year before borrowing prices began to rise and lock in a mortgage rate of about 2.6%.

However, the 30-year-old works in the mortgage sector, where business has decreased since mortgage rates reached 6% for the first time since 2008.

He claimed he was cutting back on expenditures and canceling Christmas plans because he feared losing his job “every day.”

A certain amount of inflation is considered beneficial, but unexpected, sharp price increases make it difficult for firms and households to plan and limit spending, which hurts economic growth and gradually lowers living standards.

In order to decrease demand for expensive products like automobiles, homes, or corporate expansions, central banks plan to raise borrowing costs for individuals and firms. This should lessen the pressures driving up prices.

Less economic activity, however, also means less job creation and other negative economic effects.

Home sales have plummeted in the US, where the economy shrank in the year’s first half. As a result, many businesses have implemented job cuts or hiring freezes to warn of rising costs and an impending slowdown.

Read Also: Recession: Is the US heading into a downturn? 

At the moment, there are few indications that the US labor market is slowing down, which supports consumer spending, which is the major engine of the US economy.

But the Fed has been under increasing pressure. Senator Elizabeth Warren, a well-known progressive, referred to the Fed’s actions as “excessive” on Wednesday.