By I. Toledo
After inflation in the USA hit a 4-decade high in the span of 12 months this June, consumer prices marking a 9.1% increase from the year before, the Federal Reserve (Fed) has activated damage control. As a means of cooling down the hottest inflation in 40 years, the country’s central bank is increasing interest rates continuously, having hiked the rate 6 times this year. Currently, the Fed interest rate is at 3.75 to 4.00%, marking the fourth consecutive time the rate has been hiked.
Figure 1 – Graph showing the Federal Reserve Interest Rates in 2022
Why does the Fed raise interest rates to control inflation?
Hiking interest rates is the Fed’s major tool for lowering inflation. This happens because loans become more expensive for both businesses and consumers and savings become more lucrative due to greater interest payments, thus stimulating people to buy less and instead save their money. This reduces money circulation and cools off the economy whilst also lowering prices, as, with fewer demands for consumer goods, sellers are forced to lower their prices to retain customers.
Effects of hiking interest rates
The impacts of the rise of interest rates can be either positive or negative depending on who you are. Some of these effects include: