Image Commercially Licensed From: Unsplash
…
As inflation drops a level or two, the US central bank hiked interest rates again as part of its work to stabilize prices in the largest economy in the world.
The critical rate set by the Fed went up by 0.25 points.
Last year, there were several big rate hikes, but this is the smallest one since March.
But the Feds said they didn’t think they were done raising rates, even with signs that US inflation is slowing.
After the financial crisis and years of low rates, people worldwide are paying attention to the bank’s moves because the US is leading a change.
On Thursday, the Bank of England and the European Central Bank will likely raise their interest rates.
The Fed’s decision to raise interest rates on Wednesday wasn’t a big surprise. It raises the bank’s benchmark to between 4.5 and 4.75 percent, the highest rate since 2007.
By making it more cosytly to borrow money, the Fed hopes to slow the economy and make it easier for prices to go up.
But the government risks kickstarting a painful recession if the economy slows so much that many people lose their jobs.
As higher borrowing costs hurt things like housing and the US economy, there is more pressure on the bank to slow or stop raising interest rates.
Recent data show that US inflation dropped to 6.5% last month. This has made these voices louder, of course.
Many investors have been betting that the bank won’t raise rates again after this meeting.
But Jerome Powell, the head of the Federal Reserve, said that bank officials are still worried about data showing that the costs of many services, like health care, are rising much faster than the healthy rate of 2%.
He said the bank would rather raise rates too much than say the problem is solved too soon.
He said, “The work isn’t done yet.” “Recent events are good news, but we need much more proof before we can be sure that inflation will stay low.”
Fed officials said in a statement about their decision that they still thought “ongoing” increases were the right thing to do.
In December, they said the bank’s benchmark rate could be higher than 5% by the end of 2023.
Powell wouldn’t say whether or not officials had changed their minds, saying that the future was “uncertain.”
The stock market went up during and after the news conference, and the S&P 500 ended the day more than 1% higher.
An economist at Wells Fargo named Jay Bryson said that the market’s gains could mean that investors are more confident that the central bank will be able to keep prices stable without causing a recession.
But Ronald Temple, the head market strategist at Lazard, said that if investors get too sure that rate hikes are over, it could make the Fed’s job harder.
He said that the more the markets fight against the Fed, the harder it will be to stop inflation.
Does a drop in US inflation influence the rest of the world?
Prices went up all over the world because of the US. Should the rest of the world do the same now that price inflation in the country is slowing down?
Inflation started in the United States, which was the first major economy. This happened when the government gave out a lot of money to help people during a pandemic, which made a lot of people spend more money and do more things.
Soon, prices around the world went up. The price of oil and other necessities went up because Americans bought more of them. This caused global shipping companies to raise their fees, and companies with shortages also raised their prices.
Then, when the US central bank started raising interest rates to fix the problem, a lot of money rushed into the country. This sent the dollar to its highest level in 20 years and caused prices in other countries to increase even more.
They didn’t just make the cost of living go up so quickly. The war in Ukraine also played a big role, especially in Europe, where it cut off food supplies and messed up energy markets.
Still, analysts say that if America’s inflation problem is improving, it’s good news for the rest of the world, especially if the central bank can stop fighting so hard and let exchange rates settle.
Getting the prices of goods and energy to go down
According to the most recent report from the US, annual inflation, which measures how quickly prices are going up, was 6.5% in December. It was the smallest rise in more than a year, and it was the sixth month that the rate went down.
Read Also: US economy surpasses growth expectations
This is because the prices of used cars, appliances, and other items in high demand during the pandemic have decreased, especially in the United States.
It has also shown that prices have decreased worldwide as oil markets get over the shock of the Ukraine war. Investors bet that as economies slow down to fight inflation, energy use will go down.
Analysts think prices will go down on even more things in the next few months as the US economy slows down and demand drops because borrowing costs are rising.
