This story is part ofCNET’s coverage of how to make smart money in an uncertain economy.
Last year, the Federal Reserve struggled with inflation. From grocery to gas,during the last 12 months. In response, the Fed has remained aggressive in raising interest rates, the main resistance to efforts to lower inflation. But inflation may begin to slow in December, with inflation showing early signs of cooling.
The latest Consumer Price Index, an inflation report, showed that inflation eased in October, rising 7.7% for all goods over the past twelve months. finally. In fact, inflation in September was 8.2%.
The Fed has remained steadfast on raising interest rates, with Fed Chairman Jerome Powell consistently saying the Fed will ease interest rate hikes unless it sees significant progress in inflation. – life of the central bank. The October report may be what the Fed is looking for, and it has indicated at the November meeting that it could slow the pace at which it will raise interest rates in December.
Raising interest rates is the Fed’s main measure against inflation. Historically, when interest rates rise, the cost of borrowing helps slow down the economy, with fewer consumers taking on new accounts. This in turn helps to keep costs down. But the inflation we are experiencing today is a little different than it was a decade ago. Currently, inflation remains high due to many factors, including the war in Ukraine, the pandemic demand challenge and supply chain struggles. Despite several rate hikes, the Fed has not been able to control inflation.
Many are concerned that rising borrowing costs could outpace the economy,: an economy that is shrinking, not growing. The Fed recognizes the negative effects and risks of this restrictive monetary policy.
Although a recession could cause pain for the economy and American workers, the Fed has indicated that allowing inflation to persist poses a greater threat. Here’s everything you need to know about high inflation, interest rate hikes and what’s next for the economy.
What happens to inflation?
Inflation has been high throughout 2022, reaching 9.1% annually in June. Since then, the rate of inflation has generally decreased slightly – in October, inflation was up 7.7% from last year, according to the Bureau of Statistics Statistics. . Inflation was primarily due to higher prices for gas, food and housing. If the cost of living decreases, Prices continue to rise, whether it’s retail or housing.
In times of inflation, the dollar has less purchasing power, making everything you buy more expensive, even though you may not earn more. In fact, more Americans are living paycheck to paycheck, and wages are not keeping up with the rate of inflation.
Why is the cost of living still so high?
Much of what we see in the economy today can be attributed to contagion. In March 2020, the onset of the COVID-19 pandemic caused the US economy to shut down. Millions of workers were laid off, many companies were forced to close their doors and global supply chains came to a screeching halt. This has caused the flow of goods manufactured and produced abroad and sent to the United States to stop for at least two weeks, and in many cases, for months, said Pete Earle, an economist at the American Institute. for Economic Research.
But the drop in supply has been met by increased demand as Americans begin buying durable goods to replace the services they used before the pandemic, said Josh Bivens, director of research at the Economic Policy Institute. “The pandemic is putting distortions on the supply and demand side of the U.S. economy,” Bivens said.
Even as the impact of COVID-19 on the U.S. economy eases, job disruptions and supply-demand imbalances persist, including shortages of microchips, steel , equipment and other goods, which causes a decrease in production and construction. Unexpected shocks in the global economy have worsened the situation – especially the next variant of COVID-19, the lockdown in China (which limits the availability of goods to the United States) and Russia’s war with Ukraine (which affects the price of gas and food), said the World Bank.
Some MPs have also accused companies of seizing inflation as an excuse to raise prices more than necessary, a form of money laundering.
Why is the Federal Reserve raising rates?
With inflation rising, the Fed is under intense pressure from politicians and consumers to control the situation. One of the primary goals of the Fed is to promote price stability and keep inflation at a rate of 2%.
By raising interest rates, the Fed aims to slow the economy by making borrowing more expensive. In turn, consumers, investors and companies stop investing and buying with credit, which leads to a decrease in economic demand, theoretically revolving around the price and balance the balance of supply and demand.
The Fed raised the federal funds rate by a quarter of a percentage point in March, followed by half a percentage point in May. It then raised rates by three-quarters of a percent in June, July, September and November.
The federal funds rate, which currently ranges from 3.75% to 4%, is the interest rate that banks charge for loans and advances. And there’s a trickle-down effect: As banks spend more money on loans, they compensate by raising rates on consumer loan products. This is how the Fed effectively raises interest rates in the US economy.
However, rising interest rates can only significantly reduce inflationary pressures, especially when current factors are on the supply side — and globally. More and more economists say that the situation is more difficult to control, and that the Fed’s monetary policy is not enough.
Can we avoid recession now?
A recession looks more likely, and Powell himself has said we may be headed for a period of “lower growth.” However, the impact of these policy actions on prices and wages remains unclear.
Officially, the National Bureau of Economic Research is calling for a recession. According to them, a recession is “a slowdown in economic activity that spreads throughout the economy and lasts for a few months.” This means that gross domestic product, or gross domestic product, is falling, along with lower manufacturing and retail sales, as well as lower incomes and lower employment. The first quarter of 2022 fits that definition, but no official call has been made yet.
Will unemployment rise?
The unemployment rate in the United States is expected to rise in the coming years. Currently, unemployment sits at 3.5%, according to the BLS, but the Fed expects unemployment to reach 4.4% by 2023, as noted in summary of economic forecasts.
Historically, pushing the rate too fast can dampen consumer demand and stifle economic growth, leading companies to lay off workers or stop hiring. This often leads to unemployment, which creates another problem for the Fed, as it is also tasked with maintaining maximum employment.
In general, inflation and unemployment have an inverse relationship. When more people work, they have more money to spend, leading to an increase in demand and an increase in the cost of living. However, when inflation is low, unemployment tends to be higher. But with prices remaining so high, many investors are worried about the season aheadthe toxic combination of slow economic growth with unemployment and inflation.
Here’s what higher interest rates mean for you
Raising interest rates meansor a , because you will pay more interest. A higher rate may result in refinancing your loan or . In addition, the Fed’s hike will raise interest rates this means your credit will increase with the unpaid balance.
Security and crypto markets may be negatively affected by the Fed’s decision to raise rates. When interest rates rise, it costs more to borrow money, leading to a decrease in liquidity in crypto markets and markets. Investor psychology can also cause the market to fluctuate, as cautious investors may move their money from stocks or cryptos to more conservative investments, such as.
On the other hand, a rise in interest rates can mean a. The interest rate on the savings account is directly affected by the federal funds rate. Several banks have already increased their annual percentage yield, or APY SY due to Fed rate hikes.