IN the past 2 weeks, the economy of the United States (US) has been rocked by a series of 2 bank runs while a third was prevented after the Federal Reserve, the Treasury Department, and the Federal Deposit Insurance Corporation (FDIC) stepped in and made an emergency rescue.
And just recently, the Federal Reserve has concluded a meeting to address this banking crisis.
The Federal Reserve or the Central Bank of the United States has announced a 0.25% increase in interest rates bringing the target range from 4.75% to 5%.
This marks the 9th consecutive rate rise and the highest since 2007.
Inflation is still currently running at 6% – well above target – and the interest rate increase sends a message that the Federal Reserve is dedicated and prioritizing its fight against inflation.
“Turning to the broader economy and monetary policy, inflation remains too high, and the labor market continues to be very tight. My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2 percent goal. Price stability is the responsibility of the Federal Reserve. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all,” said Jerome Powell, Chair, Federal Reserve.
This strategy was put in place as it will discourage people from spending and effectively lowering demand.
With higher interest rates and the lag effect, a slowdown in the economy is expected.
However, in this environment, the expectation is that unemployment will rise.
The Fed needs to maintain an aggressive stance against inflation in order to suppress inflation expectations.
Despite elevated inflation, longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.
