- Higher interest rates make borrowing and spending more difficult in the economy, lowering demand
- The Fed is expected to raise interest rates three more times in 2022
- The next Fed hike will come by July 27
As Americans defy 40-year high inflation, the Federal Reserve continues its efforts to rein in prices by raising interest rates.
The release of the Consumer Price Index this month revealed that inflation rose 9.1% in June compared to the same time last year, marking the largest increase since November 1981.
The Federal Reserve raised interest rates in June by 0.75 percentage points to a range of 1.5% to 1.75%, the largest rise since 1994, USA TODAY reports. More advances are likely, with the next rally expected on Wednesday.
But why are increases used to combat inflation and how do they work?
When will the Fed raise interest rates again?
The Fed is expected to announce another increase at the end of the two-day Federal Open Market Committee meeting on Wednesday, 2 PM ET. The Federal Open Market Committee is the body within the Federal Reserve that decides monetary policy, including interest rates. Further hikes are expected at the committee’s meetings scheduled for September, November and December.
How does the Fed’s raise work? How does it affect the prime rate, 10-year Treasuries?
As the country’s central bank, the Federal Reserve is responsible for monetary policy. Its dual mission is to promote “maximum employment and price stability in the US economy”. Stable prices means keeping inflation in check, with a long-term average annual target of 2%.
In 2020, CPI inflation is 1.4%. In 2021, it was 7%.
One of the Fed’s main tools for influencing inflation is the federal funds rate, which is the rate that banks charge each other for overnight loans.
Although the Fed does not directly control all interest rates, When you raise the federal funds rate, all other interest rates eventually follow, including adjustable rate mortgages, credit cards, home equity lines of credit, and other loans. Some are tied to the base rate, which is based on the federal funds rate, according to Bankrate.com.
A higher fed funds rate also affects 10-year Treasuries, affecting mortgages.
Borrowing money then becomes more expensive for consumers who spend less. Demand begins to decline and inflation, in theory, begins to decline.
Meanwhile, some Americans, particularly the elderly, see their coffers backed by higher bank savings rates.
How many times will the Fed raise interest rates in 2022?
The Fed has raised interest rates three times this year. The pandemic shutdown of the economy kept rates near zero before the Federal Reserve raised interest rates by 0.25 percentage points in March, the first increase in more than three years.
An additional 0.50 percentage point increase came in May, followed by another 0.75 percentage point increase in June, bringing the rate into its current range of 1.5% to 1.75%.
How far will the Fed raise interest rates?
Fed Chairman Jerome Powell said at a press conference in June that 0.50 points, or 0.75 points, was “most likely” in July. Some economists believe a full percentage point move is possible but unlikely.
Economists polled by Bloomberg expected a rise of 0.75 points in July, and the following The rate increases to reach a range of 3.25% to 3.5% by the end of 2022.
Is raising interest rates good for stocks?
Higher interest rates create volatility in the stock market. The value of future earnings tends to fall when interest rates are expected to rise, according to the US Bank, making investors less willing to raise stock prices.
Higher interest rates are meant to slow the economy, which could hamper companies’ revenue, potentially hurting their growth and stock prices, according to Forbes.
Contributing: Paul Davidson, Medora Lee