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Wednesday, October 4, 2023

what you need to know

The Federal Reserve is poised to raise interest rates after seven hikes last year, as the central bank tries to control inflation and avoid a recession.

The Fed’s monetary policy committee will meet in the nation’s capital from January 31 to February 2. 1 for its first meeting of 2023. The country continues to grapple with economic woes as consumers weather the strain of inflation woes and recession fears.

Here’s what you need to know about the Fed’s rate hikes:

Seven increases in the last year

The Federal Open Market Committee, the panel of Fed officials responsible for setting monetary policy, raised interest rates seven times last year: in March, May, June, July, September, November and December.

The Federal Reserve’s benchmark interest rate range affects overnight lending among US banks and influences credit cards, auto loans, mortgages and credit products. Higher interest rates tend to slow down the economy and reduce inflation, while lower interest rates are meant to stimulate the economy and increase employment.

Last year’s series of seven hikes represents the most changes the Fed has made to interest rates since 2008, when the bank cut rates seven times during the financial crisis and Great Recession.

The nation then enjoyed record low interest rates for more than a decade after the Great Recession as policymakers tried to recover the economy. The Federal Reserve slowly raised interest rates between 2015 and 2018, but reversed some of those increases in 2019 before cutting rates again during the start of the COVID-19 pandemic in 2020.

A smaller hike on the horizon?

The Fed’s first hike of the cycle in March raised the federal funds rate by 25 basis points, or 0.25 percentage points, and was followed in May by a 50 basis point hike.

The Fed then issued four consecutive 75 basis point hikes in June, July, September and November before switching to a 50 basis point hike in December.

The bank is expected to issue a 25 basis point increase on Wednesday, which would be the smallest increase since last March.

Do rate increases work?

The recent spate of interest rate hikes was aimed at curbing record inflation, which was driven by a variety of factors, including pandemic-related headwinds, supply chain issues and trillions of dollars in federal stimulus.

The Fed’s changes are an effort to balance the economy, but officials have acknowledged that raising rates too high for too long could lead to a potential recession.

The Federal Reserve raised its benchmark interest rate to a high of 19 percent in 1980 as it tried to rein in the Great Inflation, and while the move triggered a recession, the tighter monetary policy was eventually able to bring inflation down after a few years.

What do rate hikes mean for consumers?

Inflation seems to have cooled, but consumers are still feeling its effects.

Gas station prices have dipped after rising to an average of more than $5 a gallon in the wake of Russia’s invasion of the Ukraine early last year, but trackers now suggest the cost could rise again and hit as high as $4 in the next few months.

And the costs of other goods continue to rise, too, as evidenced by recent calls by lawmakers to investigate rising egg prices, which have more than doubled from last year, according to the Bureau of Labor Statistics, to $1.79. per dozen in December 2021 to $4.25 in December 2022 amid an outbreak of bird flu.

While the US economy is not yet in a recession, some sectors, such as the housing market, have experienced deep declines.

Higher mortgage rates have made it more difficult for Americans to buy homes, especially as they feel the pressure of inflation on the price of food, gasoline and other necessities.

The University of Michigan Consumer Confidence Index was 64.9 this month, up from 59.7 in December, indicating that Americans feel better about the economy, but still 3.4 percent. lower than this time last year.

Will rate hikes end?

Fed Chairman Jerome Powell has indicated that the central bank is cutting interest rate hikes, although it is unclear exactly when they will stop altogether.

After the monetary policy committee wraps up later this week, Powell is expected to underscore that the Fed’s fight against inflation continues and the effects of the increases are still being examined.

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