The US Federal Reserve, inflation and interest rates have consistently made headlines in recent years.
Recovery from the COVID-19 pandemic has unleashed demand across industries, while global supply chains have been hampered by factors including Russia’s ongoing war in Ukraine and lockdowns in China last year.
This global imbalance between supply and demand has caused prices to rise for a wide range of consumer products, from gasoline to groceries. The result has been a loss of purchasing power for US consumers as their dollar needs to stretch further.
In economic terms, since mid-2021 the US has been mired in high inflation that has been impossible to ignore. According Data from the US Department of Laborthe inflation rate in March 2022 was 8.5 percent, well above the 2.6 percent in March 2021 and 1.5 percent in March 2020. Inflation stood at 5 percent. percent in March 2023, a marked decline from last year, but still very high.
Coping with rising inflation rates in the US is the job of the country’s central bank, known as the Federal Reserve.
Here, Investing News Network provides investors with insight into the Fed’s role in US monetary policy and answers the question, “Why is the Fed raising interest rates?”
What is the United States Federal Reserve?
The Federal Reserve, often referred to as the Fed, is the central bank and monetary authority of the United States. It was established by the Federal Reserve Act in 1913, which gave the Federal Reserve responsibility for setting monetary policy in response to the bank run of 1907.
“The panic was caused by an excessive speculative investment buildup driven by loose monetary policy,” explains Investopedia. “Without a government central bank to turn to, US financial markets were rescued from the crisis by personal funds, guarantees, and major financiers and investors, including JP Morgan and John D. Rockefeller.”
Although it is an independent government agency, the Federal Reserve is accountable to the public and the United States Congress. The current Fed chair is Jerome Powell, an investment banker who served as deputy secretary and deputy secretary of the Treasury Department under President George HW Bush. Powell took command of the Fed in 2018.
The Fed has a double mandate: to achieve stable prices and stable employment. The government agency also provides banking services and is the main regulator of the country’s banks. In times of economic turbulence, the Fed also acts as a lender of last resort.
It is important to note that while the Fed manages domestic monetary policy and regulates the US financial system, its actions also have a powerful influence on the global economy.
How does the US Federal Reserve regulate monetary policy?
The Fed regulates monetary policy and the financial system by setting interest rates, as well as influencing the money supply and, as it has done recently, boosting financial markets by making asset purchases worth trillions.
Buying and selling US Treasuries to control bank reserves and interest rates is one of the strategies the Fed uses to fulfill its dual mandate of stable prices and stable employment.
Why does the US Federal Reserve raise or lower interest rates?
For more than a century, the Federal Reserve has been tasked with keeping an eye on any structural risks to monetary stability in the US financial system. Rising inflation and high unemployment are two of the biggest threats to monetary stability.
During times of slow economic growth, the Fed lowers interest rates to stimulate the economy. Lower interest rates in effect reduce the cost of borrowing and investing for both businesses and individuals.
Faced with rising inflation, the Federal Reserve raises interest rates in the hope of controlling the rapid rise in prices by curbing demand. The Fed’s goal is to keep inflation around its 2 percent target rate. When interest rates are higher, borrowing money becomes more expensive, ultimately slowing consumer spending and reducing business growth.
“The principle of inflation targeting is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation.” according to Investopedia.
How much has the US Federal Reserve raised rates since 2022?
In an effort to combat inflation, the US central bank has been steadily raising rates since its 25 basis point hike in March 2022. Its 75 basis point hike last June was then the biggest since 1994.
The Fed has now raised interest rates by 4.75 percentage points since March 2022.
|___Date of FOMC meeting___||___Rise in rates in basis points___||___Fed Funds Target Rate___|
|January 25-26, 2022||N/A||0 to 0.25 percent|
|March 15-16, 2022||+25||0.25 to 0.5 percent|
|May 3-4, 2022||+50||0.75 to 1 percent|
|June 14-15, 2022||+75||1.5 to 1.75 percent|
|July 26-27, 2022||+75||2.25 to 2.5 percent|
|September 20-21, 2022||+75||3 to 3.25 percent|
|November 1-2, 2022||+75||3.75 to 4 percent|
|December 13-14, 2022||+50||4.25 to 4.5 percent|
|January 31 to February 1, 2023||+25||4.50 to 4.75 percent|
|March 21-22, 2023||+25||4.75 to 5 percent|
How many times does the Fed meet a year?
The Federal Open Market Committee (FOMC) is the Fed’s monetary policymaking body. The 12 members of the FOMC are: the seven members of the board of governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the 11 reserve bank presidents who rotate in positions for one-year terms.
the FOMC hold eight meetings per year, typically scheduled every seven weeks. According to the Fed websiteDuring these meetings, the FOMC “reviews economic and financial conditions, determines the appropriate monetary policy stance, and assesses risks to its long-term objectives of price stability and sustainable economic growth.”
How many more US Federal Reserve meetings this year?
several more Fed meetings are scheduled for 2023and market participants will closely watch these events.
It is too early to tell exactly what the Fed will do in these remaining meetings, but its march statement gives some clues: In it, the central bank says it “anticipates that additional policy tightening may be appropriate to achieve a monetary policy stance that is tight enough to return inflation to 2 percent over time.”
However, the current US banking crisis has caused the Fed to consider the possibility of a recession by the end of the year.
“Events in the banking system in the past two weeks are likely to result in tighter credit conditions for households and businesses, which in turn would affect economic outcomes,” Fed Chairman Jerome Powell said. said during a press conference after the conference. “As a result, we are no longer stating that we anticipate that ongoing rate increases will be appropriate to quell inflation. Instead, we now anticipate that further tightening of policy may be appropriate.”
This is an updated version of an article first published by the Investing News Network in 2022.
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Securities Disclosure: I, Melissa Pistilli, do not have any direct investment interest in any of the companies mentioned in this article.
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