Economic News
The Federal Reserve and ECB Brings The Market Back to Earth
Fed has raised interest rates yet again, warning that further hikes will be required to slow the rate of price increases.
According to Federal Reserve projections, the bank’s benchmark interest rate might rise to 5% in a year. However, officials are treading more carefully after signals that the most severe inflation in decades may be easing. They reached an agreement to raise the bank’s key interest rate by 0.5 percentage points.
This increased the Fed’s benchmark rate target range to 4.25%-4.50%, the highest level in 15 years. However, it was a lesser increase than in previous announcements.
Federal Reserve Chairman Jerome Powell stated that the bank wanted to take a breather to assess how the economy is reacting to the cumulative impact of the rate hikes, which have boosted the cost of mortgages, vehicle and business loans, and credit card debt. However, he cautioned that the gain on Wednesday was “still a historically high increase, and we still have some way to go.”
The bank’s choices are being widely scrutinized around the world as the United States leads a global transition to higher borrowing costs following years of low-interest rates during the financial crisis.
According to the Fed, the United Arab Emirates and Saudi Arabia increased borrowing costs on Wednesday.
The Bank of England, which has warned that the country is in the midst of its deepest recession on record, is poised to announce its own 0.5 percentage point increase on Thursday, following approval of a larger increase last month. The European Central Bank is preparing to make a similar move.
Is inflation decreasing?
The Fed raised interest rates for the eighth time this year on Wednesday.
The bank is reacting to US inflation, which is still around a 40-year high, though it has declined since peaking at 9.1% in June, aided by a drop in energy costs.
According to the most recent US data, consumer prices increased 7.1% in the 12 months that ended in November, down from 7.7% in October.
Mr. Powell stated that while signals of inflation improving pleased him, he needed “much more information” to be certain that it was on a sustained downward trend.
“It’s encouraging to see progress, but we still have a long way to go to achieve pricing stability,” he said.
By boosting borrowing costs, the Fed hopes to reduce economic activity and relieve pricing pressures.
However, authorities face the risk of precipitating a severe economic crisis in the world’s largest economy.
Fed projections
Policymakers forecast the US economy to grow by 0.5% next year, significantly below historical norms, while the jobless rate climbs to 4.6%, according to projections released following the bank’s meeting.
While most members expect inflation to reduce, they expect it to remain above 3% in 2025, which is greater than the bank’s 2% target.
Overall, their attitude was more pessimistic than it had been just a few months earlier, suggesting fears that the easy phase of the struggle against inflation has passed.
“The Fed remains evasive about the possibility of a recession, but with most Fed officials viewing risks as being skewed to the downside, it’s fair to say they are far more concerned about the economic outlook than they are willing to admit,” said Seema Shah, chief global strategist at Principal Asset Management.
Some sectors of the economy, such as the property market, have already slowed substantially as a result of increasing interest rates.
Moreover, despite a solid labor market, there are concerns about broader weakness.
Anglero Hoodies, a tiny garment firm in New York, claimed owner Juan Carlos Anglero has noticed a slowdown in sales as increasing expenses reduce clients’ willingness to spend on non-essentials.
Last year, he added, it took less than a month to sell out his most expensive hoodie, a $479 black sweatshirt lined with imitation mink fur. He quadrupled his supplies for the holiday season this year, but buyers are migrating to less expensive options, such as t-shirts.
“I definitely sense the difference,” he remarked from his kiosk at a holiday market in New York. “There is obviously greater pushback than last year.”
The Fed has come under increasing pressure to weigh the costs of its programs.
Mr. Powell, on the other hand, stated that the bank was focused on inflation, which he claimed would have a considerably more harmful economic impact in the long run.
“I wish there was an easy solution to restore price stability,” he remarked. “There isn’t one. This is our best effort.”
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