UPSC Exam   »   Impact of US Inflation in India   »   Fed Increase Interest Rate 2022

Fed Increase Interest Rate 2022: Highest Increase in Interest Rate Since 1994

 

Fed increase interest rate 2022: Relevance

  • GS 3: Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.

 

Fed interest rate hike: Context

  • Recently, US Federal Reserve has hiked its benchmark interest rate by 0.75% point, which is the biggest hike since 1994.

 

Fed interest rate decision: Key points

  • The step has been taken to counter the fastest pace of inflation in US in over 40 years.
  • Investors worry that Fed, in order to slow the economy, may end up posing serious problems for consumers and companies.
  • A recent poll also reports that the majority of the Americans believe inflation is the biggest problem in the US.

 

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Highest increase in Interest rate by Fed: Reason

  • At present, the US economy is strong and unemployment is also low. Due to these reasons, the Fed is able to focus primarily on reducing inflation.
  • The problem, however, is that the inflation is so high (8.6%) that bringing it down may require the highest interest rates in decades, which could weaken the economy substantially.
  • Due to this, the Fed is trying to execute a so-called soft landing.

 

What is soft landing?

  • A soft landing refers to the way that the Fed is attempting to slow inflation without causing a recession.
  • In order to stabilize prices while not hurting employment, the Fed expects to increase interest rates very rapidly in the coming months.
  • Historically, when the Fed has had to raise rates quickly, economic slowdowns were inevitable.
  • Experts have argued that the central bank’s policy tools have become more effective since its last inflation fight in the 1980s, this sticking to the landing is possible this time.

 

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High interest rate in US: What is means for the consumers?

  • When the central bank increases the target rate, money becomes more expensive to borrow.
  • When interest rates are higher, banks pay more to borrow money, but then they charge individuals and businesses more interest as well, which is why mortgage rates rise accordingly.
  • When interest rates are higher, fewer people can afford homes and fewer businesses can afford to invest in a new factory and hire more workers.
  • Higher interest rates in the U.S. can have similar impacts on the global economy, whether by driving up their borrowing costs or increasing the value of the dollar, which makes it more expensive to purchase U.S. goods.

 

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