The Federal Open Market Committee of the Federal Reserve raised its interest rate by half a percentage point on May 4, its second rate hike this year.
The inflation rate sits at 8.5%, the highest rate in 40 years, while supply and demand imbalances persist due to pandemic-related supply chain disruptions.
The Fed announced that energy prices remain high as the Russian invasion of Ukraine disrupts global energy supplies. and coronavirus-related lockdowns in China will also likely impact supply chains. These events are creating upward pressure on inflation, leaving the US economy “highly uncertain” about the future, according to a Fed Board press release.
The committee is determined to bring the inflation rate back to its long-term objective of 2%. To achieve this, the committee decided to raise the federal funds rate to its target rate of 1%.
The increase foresees a few approximate months for businesses and consumers. Inflation should remain high with rising interest rates.
Still, the uncertainty leaves consumers and businesses worried. As businesses slowly reopen, travel restrictions ease, and consumers attempt to resume their pre-pandemic lives, the Fed’s decision will lead to many unexpected behaviors in the market.
There are still some certainties that consumers can expect, such as rising savings rates and credit cards reflecting rising interest rates. Loans for cars and homes are affected by a consumer’s credit history, which means the latest hike can have a big impact on buyers’ loan rates.
“Borrowers with poor credit can pay 20% or more, while those with pristine credit could enjoy near-zero rates,” Jonathan Smoke, chief economist at consulting firm Cox Automotive, told The New York Times. .
Home loans are not directly affected by the federal funds rate, but they are reflected in the yield on 10-year Treasury bills. The return is strongly influenced by the expectations of market participants regarding the state of the economy, which is largely influenced by the decisions of the Fed.
The cost of borrowing will increase as lending and financing rates increase. These increases will have a significant impact on low-income people.
The increase in rates is intended to slow down the demand for goods and services and reduce the rate of inflation.
Investors fear, however, that the Fed will raise interest rates too high and too quickly, which could push the economy into another recession.
Rising interest rates can affect the day-to-day decisions businesses and consumers face.
For one, the stock market showed a sharp increase in volatility amid the announcement. Since May 10, stocks have been falling as investors worry about the Fed’s slow response to high inflation rates that are expected to continue.
Market participants’ expectations based on the federal funds rate can strongly influence the direction of the economy. This is not the last rate hike, as the Fed has signaled its intention to raise the rate by the same amount at its next two meetings.
“There is a general feeling within the committee that additional 50 basis point increases should be on the table in the next two meetings,” Fed Chairman Jerome Powell told a news conference. May 4.