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How does the Fed increase interest rates affect the US economy?

With the decision to lift interest rate, the US Federal Reserve (FED) forecasted to raise interest rates in the remaining 6 meetings of this 2022, with the target interest rate touching 1.9% by year-end. Even, officials forecast there will be a rate hike of 50 basis points in the remaining 6 rate hikes.

Speaking after two days of policy meetings, Fed Chairman Jerome Powell said that factors that restrain inflation are at a 40-year high, such as less congested supply chains or increased labor force participation. did not take place. So the Fed is forced to act.

However, according to experts, having up to 6 more interest rate hikes from now until the end of the year instead of 3 times as previously announced will have more or less impact on the US economy and consumers, most directly on spending. Borrowing fees will increase.

How does the Fed increase interest rates affect the US economy?  - Photo 1.

People on the streets of New York, USA. (Photo: AP)

For individuals, in the short term, interest rates on credit cards, interest rates on car loans will increase immediately.

In the long run, mortgage interest rates will increase. As a result, many Americans who plan to buy a home later this year may push it early to avoid higher mortgage rates.

For businesses, higher borrowing costs mean narrower margins and higher standards for lenders. Not to mention, rising interest rates also make the capital flow into the stock channel not as large as before, making it more difficult to mobilize capital through this market.

“The target interest rate of 1.9% until the end of this year as announced by the Fed will be a great pressure for borrowers. Consumer demand will therefore also decrease significantly. However, inflation will be at 7 .9% is far ahead of the central bank’s 2% target. The task of raising interest rates is almost mandatory. There may be 3 more rate hikes in 2023 and 2 more times this year. 2024”, said Ms. Liz Miller, President of Summit Place Financial Consulting Company, New York, USA.

Currently, the prospect for the benchmark interest rate to surpass the 2.5% threshold – often considered a neutral level, has also been mentioned by many economists in 2023. This is expected to curb economic growth and cause the US to face a higher risk of recession than the goal of containing prices.

“We are looking at how much the market can absorb not only with the upcoming rate hike, but also with future increases. However, inflation now is more due to external pressure such as: transportation costs, energy prices, supply chain disruptions due to epidemics, wars… Raising interest rates will only partially contain these pressures. will need to carefully calculate the medium-term impact of raising interest rates too many times,” said James P. Moore, founder of the Washington Institute of Business and Society, USA.

In the next policy meeting in May, many forecast that the Fed will also begin to cut the amount of bonds held on the balance sheet by nearly $9 trillion.

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