Jun 16, 2022 12:30:00

Five points to know about the meaning and impact of the 'three times normal rate hike' by the United States

At a meeting on June 15, 2022, the Federal Reserve Board (FRB) of the United States

announced that it would raise the policy rate by 0.75%. The Fed's rate hikes are often 0.25% each, so the 0.75% rate hike is reported to be 'three times normal.' Fiscal experts explained why the 0.75% increase in the policy rate, which was originally less than 1% , is so bigly perceived and how it affects the economy.

5 things to know about the Fed's biggest interest rate increase since 1994 and how it will affect you
https://theconversation.com/5-things-to-know-about-the-feds-biggest-interest-rate-increase-since-1994-and-how-it-will-affect-you-185008

◆ 1: Why did the Fed raise rates?
According to Brian Blank, a researcher in public finance at Mississippi State University, the Fed's rate hike was expected to be 0.5% until just before the meeting. However, investors and financial market economists have shown that the consumer price index (CPI) for May , released by the U.S. Department of Labor on June 10, was significantly higher than expected and inflation was clearer. We raised the assumption of a rate hike to 0.75%.

As interest rate hikes tighten the economy, financial markets are wary of the economy getting too cold, and various stock indexes have fallen sharply since the CPI was announced. 'If inflation is left unchecked, it will pose serious problems for consumers and businesses. Opinion polls conducted from April to May 2022,' said Mr. Blank, explaining why the Fed decided to raise rates so significantly. The poll also found that inflation was the biggest problem Americans think they are facing right now, 'he said, saying that caution against a significant rise in prices led to a fast-paced rate hike. ..

◆ 2: What are the Fed's goals?
The Fed's steering of the

Federal Reserve has a mission to 'maximize employment while stabilizing prices.' So when the economy is sluggish and prices don't rise, the Fed tries to lower interest rates to stimulate investment. Conversely, when the economy is strong, the unemployment rate is low, so the Fed raises interest rates to curb inflation.

So far, the US economy has been very strong and the unemployment rate is low, so the Fed is well prepared to raise short-term interest rates. Inflation, on the other hand, is also very high, requiring a significant rate hike since 1994 to address this.

The problem here is the concern that the economy may slow down too much and lead to a recession. So the Fed is aiming for a so-called ' soft landing ,' Blank pointed out.

◆ 3: What is the 'soft landing' that the Fed is aiming for?
As the term soft landing is used, soft landing refers to slowing inflation and thus economic growth without causing a recession. In 2022, the Fed has raised rates by a total of 1.5 percentage points, including this rate hike, but if the rate hike is too urgent, the economy will deteriorate and employment may be hurt.

In response to these concerns, Fed Chair Jerome Powell

argues that 'since the 1980s, when we last made major inflation measures, central bank policy tools have become more effective and this time we can land successfully.' On the other hand, some economists have stated that the situation remains uncertain. According to a survey conducted by the University of Chicago and the Financial Times in early June, two-thirds of the experts surveyed said that 'a recession is likely to occur in 2023.'

'The economy is still relatively strong, so the expectation of a recession in 2023 is still fifty-fifty,' Blank said.

◆ 4: How do you know what the Fed will do next?
The

Federal Open Market Committee (FOMC) , which is led by the Fed to determine future monetary policy policies, is constantly announcing what to do to prevent financial markets from being confused by sudden policy announcements.

One of the guidance the FOMC presents about the future is the ' dot chart ,' which shows the outlook for the policy rate as a distribution of dots. The (PDF file) dot chart released by the FOMC in March 2022 stated that 'the interest rate will be raised to 2% by the end of the year and will be around 3% by the end of 2023'. The announced (PDF file) dot chart suggests 'to be close to 3.5% by the end of the year.'

'We still have a few significant rate hikes ahead of the year, and we expect it to drop to about 4% in 2023 and then down in 2024,' Blank said. Some investors predict that interest rates will be close to 4% by the end of 2022.

◆ 5: What is the impact of rate hikes on ordinary consumers?
Interest rate induction by the Fed primarily affects short-term interest rates, which in turn affects long-term interest rates. For example, if the FRB raises short-term interest rate targets, bank borrowing costs will rise, and banks will pass the rise on to consumers and businesses in the form of raising interest rates on long-term loans such as mortgages and car loans.

This is the reason why mortgage payments have surged 36% year- on-year, despite the rapid slowdown in the US housing market in 2022.

Also, the impact of rate hikes is not limited to the United States. If the US raises interest rates, the value of the dollar will increase, so the dollar will rise, leading to higher prices for American products and higher borrowing costs around the world. However, it is difficult to predict what will happen in the future because the Fed is not the only one that determines trends in the world economy.

'The ultimate impact of rate hikes on consumers will depend on whether inflation slows or speeds up, as the Fed predicts,' Blank said in a statement about future economic developments. I commented.