Inflation fight: Fed boosts key rate by 0.75 percent

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Inflation fight: Fed boosts key rate by 0.75 percent, On Wednesday, the Federal Reserve raised its benchmark interest rate by 0.75 percentage points for the third time in as many weeks in an effort to stave off the galloping inflation that is eating away at the purchasing power of ordinary Americans.

The Federal Open Market Committee recently updated its economic projection, stating that it expects the unemployment rate in the United States to increase from 3.7% to 4.4%. This would result in the addition of hundreds of thousands of unemployed people to the labor force.

Inflation increased 8.3% annually and 0.1% month-over-month, according to the Bureau of Labor Statistics data for the current month. Both numbers were much higher than projected, fueling concerns that inflation is setting in.

The crux of the issue is the persistently high level of economic demand in the face of a worldwide shortage of supplies. Consumers were awash in cash as the economy slowly recovered, thanks to their restraint during Covid lockdowns and the federal stimulus initiatives. Meanwhile, problems with Covid’s supply chain persisted, and the Russian invasion of Ukraine hampered efforts to distribute food and energy internationally.

To rectify this, the Fed is actively working to restore equilibrium between supply and demand. The Federal Reserve expects a slowdown in economic activity and lower prices as a result of its interest rate hikes, which will reduce consumer spending and borrowing. In contrast, this will cause the economy to contract.

Bankrate.com’s Greg McBride said in a report published on Monday that the Fed has been sending a “tough love” message that interest rates would stay higher, and for longer than expected. The Fed plans to hold rates at their current, restrictive levels until inflation is clearly on its path to 2%, at which point they will be raised once more.

Unemployment is expected to rise as a result of the increased rates and the subsequent weakening of the economy. Bloomberg News reported this week that Deutsche Bank expects the U.S. unemployment rate to grow by about a full percentage point, to 4.5 percent, during the next year and a half. Fed Chair Jerome Powell predicted as much in a speech last month, stating that the higher rates would “bring some pain to people and businesses” but that this was one of “the unpleasant consequences of controlling inflation.”

As he put it, “total jobs remain 5.2 million above the total number of employees, principally indicating the tight labor market and workers’ continued advantage from exceptionally favorable job-finding chances.”

The home market is feeling the effects of rising interest rates especially hard. Monday, Ian Shepherdson, chief economist at Pantheon Macroeconomics, emailed clients saying that the housing sector is currently in a “deep recession” because of the nine consecutive drops in the National Association of Home Builders index of homebuilder activity and mood. That’s why, he reasoned, the Fed isn’t likely to keep up its rapid rate of hikes, he added.

However, he warned that the Fed would be forced to slow its rate of tightening the longer and deeper the housing downturn continued.

As interest rates rise, McBride of Bankrate outlined three precautions consumers can take with their money.

He advised people to “increase emergency savings, pay off high-cost debt, and keep contributing to and keeping a long-term perspective on, retirement accounts” because of the current economic climate, which is characterized by rising interest rates and a slowing economy.