This is uncertain because inflation is driven by multiple factors, such as supply chain shortages and strong demand. The biggest unknown at this point is what will happen to inflation later this year. And changes in the economy are often hard to predict. The Fed always makes decisions based on what is happening in the economy and on how economic conditions are expected to change. While this can help reduce inflation, it also means lower economic growth. Higher interest rates would likely slow down business activity. And how will it affect the broader economy? On the other hand, higher rates is good news for savers and investors, as their returns from activities like making deposits and buying bonds will go up.Ĥ. So if you want to borrow to start a business, pay for college, buy a car or do anything else, you should expect your borrowing costs to be higher later this year. If the Fed lifts interest rates this year by 0.75 percentage point, as expected, this would translate into about US$45,000 in additional interest payments on a 30-year, $300,000 mortgage. Put simply, higher interest rates mean borrowers would need to pay more for the loans they get. What does that mean for consumers and businesses? Markets expect the Fed to raise interest rates at least two more times in 2022.ģ. The Fed does not directly control all these other rates, and the exact path they will take is not completely predictable, but the overall trend will be up if the Fed keeps raising its target rate. Banks would also gradually increase the interest they offer on deposits and savings accounts. This would affect banks’ cost of borrowing, which in turn slowly filters throughout the economy as lenders charge more for loans on homes, cars, businesses, college tuition and anything else you might want to buy with debt. Analysts expect it to be a 0.25 percentage point increase. While the Fed’s statement didn’t specify a time when it plans to raise rates, Chair Jerome Powell said “the committee is of a mind to raise the federal funds rate at the March meeting, assuming that the conditions are appropriate for doing so. The Fed sets a target range for what is called the “ federal funds rate.” This rate acts like a benchmark for all interest rates in the economy. So the Fed has to act quickly before it’s too late. And the longer it lasts, the harder-and more painful for consumers and businesses-it is going to be to bring it back to a more sustainable 2%. The Fed can ill afford to allow this to continue because if higher inflation becomes entrenched, it would damage the economy. High inflation means the prices people pay for goods and services are continually going up- especially for basic items like meat and gasoline, as well as for manufactured goods like cars. This is the highest rate of inflation recorded in the U.S. For 10 months in a row, inflation has been above the Fed’s 2% target and reached an annual pace of about 7% in December. The big problem for the Fed now is that U.S. As a reminder of how bad things were back then, over 40 million workers-a quarter of the American workforce-filed for unemployment in the first few months of the pandemic, a staggering number with no precedent in the job market.Īlthough the recession was short-lived-lasting only two months-and the economy has mostly recovered, the Fed has kept rates at rock bottom because many workers and businesses still need support as the pandemic continues to rage. The Fed quickly cut rates to zero at the beginning of the COVID-19 crisis in March 2020 in an attempt to soften the blow of the sharp recession that began that month as the U.S. We asked Alexander Kurov, a finance professor at West Virginia University, and Marketa Wolfe, an economist at Skidmore College, to explain what the Fed is doing and what it means for you.ġ. But there are also concerns that it could put on the brakes too quickly. Lifting the borrowing costs consumers and businesses pay for loans has the effect of slowing economic activity, which in turn could curb inflation. An interest rate hike would be the first time the central bank has increased its benchmark lending rate in over three years. A separate report released the next day showed the economy grew 6.9% in the fourth quarter of 2021. 26 signaled plans to begin raising interest rates “soon”-possibly in March-in a bid to tamp down inflation before it poses a serious risk to the U.S.
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