The Fed’s hot pause summer gets an ice bath: Interest rates rise again

The Federal Reserve has increased interest rates by a quarter percentage point to a 22-year high, with the aim of countering inflation.

The announcement: On Wednesday, the Federal Reserve revealed its decision to raise interest rates by 0.25 percentage points.
* This concludes the period of stable interest rates, known as the Fed’s ‘Hot Pause Summer.’

Context: For the last year, the Federal Reserve has been incrementally raising interest rates to combat inflation.
* Federal Reserve Chair Jerome Powell halted rate hikes last month, meaning that credit card interest rates would not rise and loans wouldn’t become progressively more expensive.
* Despite this pause, inflation continued dropping to around 3%, closely meeting the Fed’s goal rate of 2%. The unemployment rate also remained low.

The reasoning: Economists speculate that the Federal Reserve wants to maintain economic balance by adjusting interest rates as necessary.
* Raghuram Rajan, former head of India’s Central Bank and a professor at The University of Chicago, suggests that the Fed is trying to strike a “soft landing”: carefully raising interest rates to lessen inflation without causing a recession.
* When interest rates increase, borrowing, spending, and buying decrease, resulting in reduced business profits and potentially layoffs; both can cause a recession.
* The Federal Reserve referenced robust recent job gains, a low unemployment rate, and high inflation in their decision to raise rates.

Going forward: Economic actions like interest rate increases can take time to have an impact and the Federal Reserve will likely monitor the economy’s response in coming months.
* Matthew Slaughter, Dean of Dartmouth’s Tuck School of Business, cautions that while a soft landing is the goal, it’s common for attempts to return to a low target inflation rate to result in a recession.
* Following past patterns, there could be more interest rate hikes, but also additional pauses.

View original article on NPR

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