The US Federal Reserve increased interest rates by 0.75% on Wednesday, marking the fourth consecutive increase as the central bank keeps up its war against inflation.
The federal funds rate, which establishes the standard for borrowing for everything from credit cards to trillions of dollars’ worth of financial derivatives that support the global financial system, is now at 3.75% to 4% as a result of the increase.
However, it appears that the central bank will move forward with rate increases while being more circumspect.
Rate increases may be slowed, the Federal Reserve cautions.
The central bank will now consider how much rates have already climbed this year as well as the amount of time it will take for increases to trickle down into the actual economy when setting rates in the future, according to the central bank’s commentary issued along with the rate decision.
Wall Street first took this statement to suggest that the bank would hold off on raising rates in the future, but that interpretation was quickly disproved.
Federal Reserve chairman Jay Powell forewarned that the so-called “terminal” interest rate—the amount the Fed believes would be required to contain inflation—will be higher than anticipated in a press conference following the announcement of the rate adjustment.
In other words, it appears that the bank is willing to raise rates significantly in order to control inflation.
Bringing inflation back to the desired level
The US Federal Reserve wants to reduce inflation to its predetermined 2% level.
The idea is that by raising interest rates, individuals will try to save more money and corporations will cut back on expenditure. As businesses compete for customers’ diminished purchasing power, this should encourage them to drop their prices.
Higher rates do not appear to be having the expected impact as of yet.
Despite being lower than the 8.3% recorded in August, the US inflation rate for the year ending in September was 8.2%, more than expected.
More significantly, the inflation rate that excludes the volatile food and energy components accelerated to 6.6%, the highest level since 1982.
Both the Fed and experts are concerned about this rate. It indicates that inflation is firmly entrenched in the economy and that housing and healthcare prices are still growing.
As a result, it will be more difficult to regulate since workers would seek greater wages to offset rising costs.
What does the fight against inflation waged by the Federal Reserve imply for you?
Credit is becoming more expensive as a result of the Fed’s rate increases. The mortgage market is the one where this is most obviously being felt. Last week, the 30-year mortgage rate climbed to 7.08%. Since 2002, that is the highest level.
It is impossible to overstate the effect this will have on homebuyers’ purchasing power and, consequently, the property market.
When the average 30-year mortgage cost 3.11% in December of last year, the $300,000 loan’s monthly payments would have been roughly $1,283. Currently, buyers must pay $2,012 each month.
This implies that either home values will decline or borrowers will need to make spending cuts in other areas.
Consumers will likely pay higher borrowing charges and overall costs in other places because businesses will likely pass along their increased interest costs to customers. These price increases might only stoke the fire of inflation.
On the other side, the dollar’s worth is rising as interest rates rise. This will lower the price of imported goods and services and make international travel more affordable for American customers.