With inflation at such heights, the pressure is on the Federal Reserve to raise interest rates, according to The Associated Press.
- However, despite evidence that the economy may be slowing or shrinking—which would typically lead the Fed to stop raising or even cut rates—the job market and consumer spending remain solid, placing the agency in a difficult spot.
What’s going on: “For now, though, the Fed is focused squarely on its inflation fight, and this week it’s set to announce another hefty hike in its benchmark interest rate. Together with its previous rate increases, the Fed’s moves will make borrowing costlier for individuals and companies and likely weaken the economy over time.”
- The Fed is expected to elevate the key interest rate “to a range of 2.25% to 2.5%,” one “officials think neither stimulates nor discourages growth.”
- This will be its fourth rate rise since March.
What it means: “By raising borrowing rates, the Fed makes it costlier to take out a mortgage or an auto or business loan. In turn, consumers and businesses will likely borrow and spend less, cooling the economy and slowing price increases.”
- The increases have led to a doubling of the average rate on a 30-year fixed mortgage, while home sales have fallen significantly.
Will another raise work? “Higher borrowing rates can reduce spending. But they cannot reverse other factors, notably the global shortages of food, energy, factory parts and other items, which have been worsened by Russia’s war against Ukraine and COVID-19-related shutdowns in China.”