At a press conference on January 26, the chairman of the Federal Reserve said he should raise interest rates by March in hopes of reducing inflation.
This rise in inflation was created by supply and demand imbalances related to the pandemic and the reopening of the economy.
Inflation has reached 7% over the past 12 months. This is the fastest increase in the consumer expenditure price index since July 1982, according to the US Bureau of Labor Statistics.
Powell did not disclose any information on the degree to which the central bank will increase the federal funds rate, as changes in the economy are difficult to predict, and instead pointed out that high inflation was getting worse.
For now, the Fed is keeping interest rates close to zero. The interest rate hike should happen at the March meeting, assuming the conditions are right. This will be done to shrink the Fed’s balance sheet, according to CNN.
The rise in interest rates comes in response to 40 years of high inflation, and it’s worse than it was in December. The aim is to bring inflation down to the central bank’s 2% target, according to Reuters.
The pandemic has fueled much of this problem as it has created higher unemployment rates – the highest since the Great Depression – in addition to stimulus checks that allow more money, prices and wages to flow. higher which create imbalances between supply and demand.
Moreover, labor participation is unproductive and wages are now higher. This forces companies to face greater cost pressures in addition to supply chain pressure.
Some critics say the Fed should have ended quantitative easing and raised interest rates last quarter, but the Fed has only just announced its intention to do so.
“This will be a year in which we gradually move away from the very accommodative monetary policy that we have put in place to deal with the economic effects of the pandemic,” Powell said, according to Reuters.
Higher interest rates discourage borrowing and slow business activity. This results in lower demand for goods and services and will be beneficial in reducing inflation.
However, a higher interest rate leads to lower economic growth, which forces people to spend less. This makes buying or selling a home more difficult, as rising mortgage rates offset the affordability of the home.
Also, borrowers or those using a credit card will be negatively affected as interest rates rise. Stock market growth will slow down and cause the price of some stocks to rise, which will negatively impact some industries.
The Dow Jones Industrial Average closed at 129.64 points and market gains were destroyed after the Fed statement.
Additionally, the S&P 500 index fell 6.52 points and the Nasdaq Composite Index lost a drop of 2.82 points, according to the Washington Post.
It comes nearly two years after the central bank cut rates to zero in response to the financially threatening spread of the coronavirus. It seems that the pandemic is deciding the direction the economy should take.