The Fed Hikes Interest Rates To Curb Inflation. Will it Slow Down?

The rate hike is not a surprise, but the timing and the way it was announced are a bit surprising.

The Fed’s target for the federal funds rate was 2.0 percent. The federal funds rate is the interest rate at which banks lend money to one another and the economy. 

If the fed funds rate is higher than that, then interest rates are higher, and that means more money is available to borrowers. Higher interest rates make it difficult for people to borrow money and spend it. Consequently, the economy slows down.

Last week, the Federal Reserve increased interest rates again and issued a warning that further increases were necessary to manage the inflation that has been stubbornly high.

A percentage point was added to the central bank’s benchmark interest rate. 

The rate increased by 3.75 percentage points in the previous eight months in March. Although it is the most aggressive series of rate increases in decades, little has been done to reduce inflation yet.

Greg McBride, the chief financial analyst at Bankrate, said, “Interest rates have risen at a whiplash-inducing speed, and we’re not done yet.” Fed chairman Jerome Powell warned that taming such severe inflation will likely require even higher interest rates than he and his colleagues had predicted two months ago.

“What I’m trying to do is make sure our message is clear.” Before we reach the level of interest rates that we believe to be adequately restrictive, we still have some territory to cover. Powell said.

He, however, noted that as policymakers assess the impact that increased borrowing costs are having on the economy, the tempo of rate hikes may soon slow.

The next meeting or the one after that may mark the beginning of that time, according to Powell.

Stocks first rose when there was a chance of lower rate increases in December or January, but they quickly fell as it became clear that rates would eventually need to rise. More than 500 points were lost by the Dow Jones Industrial Average.

Rate increases are having an impact even though inflation is still out of control

While most of us continue to be concerned about the inflationary impact that the Federal Reserve’s rate hikes are having on our lives, we should also be concerned about the impact the Fed’s rate hikes are having on the economy. 

The Federal Reserve has been hiking rates since December 2020, a period in which the Fed has had a very low level of inflation.

The federal funds rate, which is how much banks charge each other to lend out money, has moved up and down on a monthly basis, from 0.75% to 3.25% and 4.5%, respectively. 

The Biden administration and the majority of Congress members have avoided interfering with the Fed’s efforts to control prices, despite polls suggesting that voters’ main concern is inflation.

However, a few Democrats have started to criticize the central bank’s strategy, stating that aggressive rate increases could result in millions of people losing their jobs.

Sen. Elizabeth Warren, D-Massachusetts, and colleagues sent a letter to Fed chairman Jerome Powell on Monday stating their grave concern that interest rate increases “risk slowing the economy to a crawl while failing to halt increasing prices that continue to damage households.”

Since mortgage rates have reached 7% for the first time in 20 years, the housing market has already slowed to a crawl 90-day period. The Fed has lifted rates by an average of 0.25 percentage points each month and has lowered them by an average of 0.25 percentage points every 90 days since December 2020.

Sen. Elizabeth Warren, D-Massachusetts, and colleagues sent a letter to Fed chairman Jerome Powell on Monday stating their grave concern that interest rate increases “risk slowing the economy to a crawl while failing to halt increasing prices that continue to damage households.”

Since mortgage rates have reached 7% for the first time in 20 years, the housing market has already slowed to a crawl.