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Fed plans to raise rates in March to keep inflation under control

The Federal Reserve announced on Wednesday that it will begin raising interest rates in March, reversing pandemic-era policies that fuelled jobs and growth — as well as stock market gains — but also persistently high inflation.

Inflation has gotten “somewhat worse” since the Fed last convened in December, according to Chair Jerome Powell. He believes that increasing the Federal Reserve’s benchmark rate, which has been zero since March 2020, will help prevent high prices from being entrenched.

Powell said that the central bank can manage the process in a way that prolongs growth and keeps unemployment low, assuaging fears that higher rates could undermine the economy. “I believe there is room to hike interest rates without jeopardising the labour market,” he said.

Economists were taken aback by Powell’s forecast for rate hikes, which included a claim that the economy is stronger now than it was in 2015, when the Fed began gradually raising rates. “The Fed is signalling that they would move earlier, and possibly at a faster pace, than we had anticipated,” said Steve Rick, chief economist at CUNA Mutual Group.

The Fed’s rate hikes will make borrowing for a home, car, or company more expensive over time. The Fed’s goal is to slow the economic growth and reduce inflation, which is at a 40-year high and eroding wage gains and household budgets in the United States.

Investors have been seized by dread and uncertainty over how fast and far the Fed will go to alter its low-rate policies, which have nourished the economy and markets for years, as the central bank’s latest policy statement follows dizzying gyrations in the stock market.

The broad S&P 500 index has dropped over 10% this month and is down marginally on Wednesday.

In response to a question concerning the stock market’s huge swings, Powell stated that the Fed’s “ultimate focus” is on the “actual economy.” “We feel like the communications we have with market participants and the general public are working,” he said, implying that recent market movements are a good indicator.

 

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