The Federal Reserve announces an interest rate hike

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The Federal Reserve announces an interest rate hike

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The Federal Reserve announced Wednesday that it will raise interest rates, a move to combat soaring inflation as the US emerges from pandemic and economic uncertainty in the wake of Russia invasion of Ukraine. The quarter-point increase comes as prices have risen at the fastest pace in the past 40 years.

In a statement following the two-day meeting of the Federal Open Market Committee, officials said the committee “has decided to increase the target range for the federal funds rate from 1/4 to 1/2 percent and expects that the continued increases in the target range will be appropriate “.

The move is not surprising. Federal Reserve Chairman Jerome Powell said in a congressional hearing earlier this month that he supports the federal funds rate hike by 0.25%. Interest rates have been close to 0% for about two years since the central bank cut rates like the coronavirus pandemic started in March 2020. This is the first time the central bank has raised the rate since late 2018.

Prices have increased by 7.9% in the last year – the fastest inflation rate since 1982. Prices increased by 0.8% last month, an acceleration from January. Personal consumption expenditures, the preferred measure used by the Federal Reserve, showed prices, excluding often volatile food and energy, up 5.2% from a year ago and 0.5% in January.

The Fed reported Wednesday that the interest rate hike is the first of a series this year. New projections show that the median of 16 officials expects the federal funds rate to rise to at least 1.875% by the end of the year.

“By raising interest rates, the Federal Reserve has started the process of easing pandemic-era stimulus measures in an effort to tame inflation,” said Greg McBride, chief financial analyst at Bankrate.com. “This is not a one-time event, but the start of a series of rate hikes for the remainder of this year and next.”

Some economists have called for a more aggressive approach, with a rate hike of 0.50% right after the gate, but the Fed has taken a more conservative approach amid uncertainty about the invasion of Ukraine. As the central bank moves to curb the price surge, the United States and its allies have done so slapped penalties on Russian banks, companies and individuals and limited trade by its invasion.

“The timing couldn’t be worse for the Federal Reserve, which is already chasing inflation for the first time since the 1980s,” said Diane Swonk, Grant Thornton’s chief economist. “The disruptions we are seeing are adding fuel to a well-lit inflation fire that goes far beyond the energy sector and could affect our daily lives much more.”

Meanwhile, the Fed has also revised down its projections for real GDP this year to 2.8% from 4% in December. They also revised the PCE inflation projection to 4.3% with core PCE inflation at 4.1%.

As the Federal Reserve raises the federal interest rate, financing costs will increase for consumers. For credit card holders, an initial 0.25% hike may be irrelevant, but rates could increase multiple times over the next year.

“It’s that cumulative effect that should push you to take action now,” McBride said. “Try to take a 0% or other low-rate balance transfer offer that can isolate you from the rate hikes we expect to see.”

Mortgage rates have already risen in recent months in anticipation of higher rates and due to inflation. Auto loan rates are also expected to rise.

The Fed is expected to be more aggressive with rising interest rates, coupled with tightening spending power higher costs for goods such as food and gas, economists have warned that the chances of a recession next year have increased.

But speaking on Friday before the Fed meeting, Treasury Secretary Janet Yellen, who previously chaired the Federal Reserve, said the economy is strong and households in general are in good financial shape. You have noticed record job creation and falling unemployment. Last month, the unemployment rate hit 3.8%.

“One of the reasons you might be worried about a recession is that you think that monetary policy in reducing inflation may cause it. We have seen this on a few occasions in the past, but we have also seen episodes where there is. a soft landing, “Yellen said.” I trust the Fed to keep inflation in check without causing a recession.

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