Fresno, California 2022-06-15 22:24:14 –
The move announced by the Federal Reserve after the latest policy meeting will raise benchmark short-term interest rates, which affect many consumer and corporate loans, from 1.5% to 1.75%.
Central banks are stepping up their efforts to tighten credit and slow growth, with inflation reaching record highs of 8.6%, spreading to more areas of the economy and showing no signs of slowing. Americans are also beginning to expect high inflation to last longer than before. This sentiment could incorporate inflationary sentiment into the economy, making it difficult to bring inflation back to the Fed’s 2% target.
The Federal Reserve’s three-quarter point hike outweighs the half-point hike previously suggested by Chair Jerome Powell that it is likely to be announced this week. The Fed’s decision to impose a rate hike as big as Wednesday admits that Russia is struggling to curb the pace and sustainability of inflation worsened by the war with Ukraine and its impact on energy prices. is.
Borrowing costs have already risen sharply in much of the U.S. economy in response to the Federal Reserve’s move, with average 30-year fixed mortgage rates above 6%, the highest level since before the 2008 financial crisis. Yes, up from just 3% at the beginning. This year’s. Yields on 2-year government bonds, the benchmark for corporate borrowing, have jumped to 3.3%, the highest level since 2007.
Even if the recession could be avoided, economists say it is almost inevitable that the Fed will have to do some pain in return for overcoming chronic high inflation, perhaps in the form of rising unemployment. increase.
Inflation culminated in voters’ concerns months before parliamentary midterm elections, damaging public views of the economy, weakening President Joe Biden’s approval rating and increasing the likelihood of democratic losses in November. .. Biden sought to show that he was aware of the pain that inflation is causing American households, but struggled to find policy actions that could make a real difference. The president emphasized his belief that the power to curb inflation lies primarily with the Fed.
Still, the Fed’s rate hike is a dull tool for trying to lower inflation while sustaining growth. Oil, gasoline and food shortages are driving inflation. The Federal Reserve is ideal for addressing many of the sources of inflation, including Russia’s invasion of Ukraine, the still clogged global supply chain, labor shortages, and the surge in demand for services from airline tickets to restaurant meals. Not suitable for the purpose.
Expectations for a larger Fed rate hike have sent various interest rates to their highest points in a few years. Yields on 2-year government bonds, the benchmark for corporate bonds, reached 3.3%, the highest level since 2007. Yields on 10-year government bonds, which directly affect mortgage rates, reached 3.4%, almost halving. Points since last week and the highest level since 2011.
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From bonds to Bitcoin, investments around the world have fallen in recent months due to concerns surrounding high inflation and the prospect that the Fed’s aggressive move to control it will cause a recession. Even if the Fed manages the subtle trick of curbing inflation without causing a recession, higher interest rates will still put pressure on stock prices. The S & P 500 has already sunk by more than 20% this year, meeting the definition of the bear market.
Other central banks around the world are also acting swiftly to quell the surge in inflation, even though they are at higher risk of recession than the United States. The European Central Bank is expected to raise interest rates by a quarter in July. 11 years. If record high levels of inflation continue, we may announce a significant rate hike in September. On Wednesday, the ECB vowed to create a market backstop that could buffer member states against the types of financial turmoil that occurred during the debt crisis more than a decade ago.
The Bank of England has raised its four rate hikes since December to its highest level in 13 years, despite expectations that economic growth will remain unchanged in the second quarter. The Bank of England will hold an interest rate meeting on Thursday.
The 19 EU countries that use the euro currency endured record inflation of 8.1% last month. The UK hit a 40-year high of 9% in April. Debt repayment costs remain restrained so far, but rising debt government borrowing costs have collapsed at the beginning of the last decade and threatened the euro area.
Last week, the World Bank warned of the threat of “stagflation” (growth slowing with high inflation) around the world.
The main reason recessions are now more likely is that economists increasingly believe that the Fed needs to significantly reduce consumer spending, rising wages and economic growth to slow inflation to its target of 2%. is. Ultimately, unemployment should almost certainly rise. The Fed hasn’t predicted yet, but the latest economic forecasts released Wednesday could do so.
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