What Are the Impacts of the US Biggest Interest Rate Hike?

Assuming the inflation squeeze doesn’t subside soon, it will put pressure on many countries to take further steps to face the ongoing economic crisis.

The high inflation rate was driven by big gains in food, gasoline, and shelter in recent months, according to the Bureau of Labor Statistics (BLS).

This general increase in the prices of goods and services in the world pushed the Federal Reserve to tamp down soaring inflation in the US, by announcing the sharpest rise in interest rates in over 20 years.

 

Interest Rate Raised

The US central bank announced on Wednesday, May 4, the largest rate increase in more than 22 years, a move meant to decrease the inflation pressure.

“The Fed’s benchmark interest rate was raised by 0.5 percentage points to a target rate range of between 0.75% and 1%,” The Guardian read.

Since 2000, the recent hike was the largest and came after a 0.25 percentage point increase a month ago which was the first increase since December 2018.

In fact, this would not be the last as more rate rises are expected.

According to The Economist Intelligence expectations.

The Fed will probably raise rates seven times in 2022, reaching 2.9% in early 2023, according to the same source.

Officials also plan to shrink their $9tn asset portfolio in June, and this will further increase borrowing costs.

The Fed said in a statement that although “overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong”.

However, it warned that the inflation “remains elevated” as the invasion of Ukraine had implications for the US economy that remain “highly uncertain” in addition to Covid-related lockdowns in China that “are likely to exacerbate supply chain disruptions.”

 

Why Is Inflation So High?

The unusual step taken by the Fed chair, Jerome Powel, to address the American people at a press conference was after the rate hike announcement in which he said: “Inflation is much too high, and we understand the hardship it is causing. We are moving expeditiously to bring it back down.”

“Some of us are old enough to have lived through high inflation and many aren’t. But it’s very unpleasant…If you are a normal economic person, then you probably don’t have that much extra to spend, and it’s immediately hitting your spending on groceries, on gasoline, on energy, things like that. We understand the pain involved,” he added.

The Inflation reasons may go back to the unprecedented impact of the Covid-19 on the global economy, in addition to the recent Russia-Ukraine conflict.

Ahead of the announcement Jamie Dimon, JPMorgan Chase's chief executive officer, warned that the Fed may have waited too long to raise rates. “We’re a little late,” he told Bloomberg. “The sooner they move the better.”

 

Inflation Impacts

The Fed’s policy is already being felt in the US economy as mortgage rates have jumped two percentage points; according to The Guardian, “some hot property markets have started to cool as a result."

The impact of monetary policy has also led to selloffs in the stock markets.

In his interview with Al-Estiklal, Hamza Genouni, researcher at Kent university, said that “inflation has led to increased pressures on food and consumer prices and service fees in the world, causing severe damage to the dynamics of the global economy.”

“Turkiye and Argentina have the highest inflation rates among the G-20 countries; the acceleration in inflation rates is prompting policymakers in central banks around the world to tighten monetary policy at a faster pace than many experts expected, especially with the Fed’s announcement this week.”

Genouni said this has automatically led to an economic and social dilemma, with the low-income groups being the most affected.

“Inflation is now running at a 40-year high in the US; in March the Consumer Price Index (CPI) was 8.5% higher than it was a year ago, driven up by rising prices for gasoline, shelter, and food and the increasing costs of essential goods and services are now outstripping average wage gains,” he concluded.

As the prices are going up at their fastest rate, 55% of Americans have stopped eating in restaurants and 39% of them reduce their travel by car while 32% stopped monthly subscriptions and 29% canceled their summer travel plans, according to CNBC and John Hopkins University.

In America, the average price of some basic materials has tripled to be the first in decades.

The price of milk for example has increased from 0.99 cents, which is less than a dollar, to three and a half dollars.

Plywood & Sheathing construction wood planks have also increased 8 times, from five dollars to forty dollars.

A recent survey by Fidelity’s Money Advisor found that “the high cost of gas prices was the number one concern for Americans, followed by being able to pay bills and inflation overall.”