May 16, 2022

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US Federal Reserve plans to raise interest rates for the first time since 2018 amid rising inflation | US economy

The Federal Reserve It is expected to raise interest rates for the first time since 2018 as it struggles with rising inflation in the United States, the impact of the war in Ukraine and the continuing coronavirus crisis.

The Fed has a dual mandate – to increase employment and keep prices in check. The job market and the broader economy have made an impressive recovery from pandemic lows, thanks in part to Fed rate cuts and a massive stimulus program, but prices are up 7.9% in the year to February — the highest inflation in 40 years.

With inflation now rising around the world, the Fed is expected to announce that it will follow other central banks, including Bank of Englandand raising rates by a quarter of a percentage point.

Federal Reserve Chairman Jerome Powell will also hold a press conference on Wednesday, where he will be asked about the central bank’s plans for future hikes.

Supply chain issues have led to spikes in a variety of areas including used cars, food and utilities that cause certain problems. The suffering of low-income Americans.

The Fed initially dismissed the rate hike as “temporary,” but has since acknowledged that high inflation is likely to remain for some time. Supply problems that appeared to be returning to normal earlier this year are now also feeling the impact of the war in Ukraine and are facing further setbacks such as: China imposes new lockdowns To reduce the spread of the new Corona virus.

Raising interest rates too quickly threatens to push the US into recession. This week, the CNBC Fed’s survey — which measures the opinions of fund managers, strategists and economists — put Recession probability in the US at 33% in the next 12 months, up 10 percentage points from the February 1 poll. The latest survey put the chance of a recession in Europe at 50%.

With inflation nearly four times the Fed’s 2% target rate, Powell made clear that the central bank would raise interest rates in an effort to rein in higher rates. But some economists question how much influence the Fed can have on such a complex issue.

JW Mason, assistant professor of economics at John Jay College, said a quarter-point rate hike is unlikely to have a significant impact on inflation or the broader economy. “It is a peculiar feature of the way we think and talk about economics today that we have given so much importance to this one political tool that this part of government uses,” he said.

Mason said he expects inflation to fall without Fed intervention over the next year – albeit “less than we had hoped it would be”. He noted that car prices – until recently the biggest source of inflation – are already falling. While he said that a series of small interest rate increases was unlikely to have a significant impact overall, “a large enough rise in interest rates would have a significant negative impact on real economic activity.”

Mason said other branches of government have been better able to deal with price issues in the broader economy, such as rising rents and home prices or gas and utilities bills, and that tools like price caps or stimulus checks can be used to ease the hardship.

Testifying before Congress earlier this month, Powell made clear he was willing to raise rates in half a percentage point larger increases if price increases did not slow.

But he also acknowledged that the economic outlook has become more complex because of the war in Iraq Ukraine.

Powell told the House Financial Services Committee that the conflict “is a game changer and will be with us for a very long time.” “There are events that are yet to come… and we don’t know what the real impact will be on US economy it will be. We don’t know if these effects will be permanent. “

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