The largest increase in federal interest in 28 years .. A US decision of global dimensions

The Federal Reserve, or the US Federal Reserve, has agreed to raise interest rates to the highest level since 1994, slowing economic growth and reducing inflation rates, which have reached their highest levels in 40 years, amid economic warnings. world of the consequences of this decision on global markets.

Federal Reserve officials announced a 0.75 percent rate hike after a two-day meeting that closed Wednesday, raising the limit on federal funding rates to between 1.5 percent and 1.75 percent.

The decision came on the basis of a meticulous plan drawn up in recent weeks by the Monetary Policy Committee, the decision-making body of the Federal Reserve, which stated that it would raise interest rates by about half a percent.

The announced details of the meeting showed that all 18 committee officials expected the Fed to raise interest rates by at least 3 percent this year, meaning that federal funding rates could reach 3.375 percent, an increase of 1.75 basis points during the meetings. The four will run into this important one, and most officials expected in March to raise interest rates by at least 1,875 percent this year, according to the “Wall Street Journal.”

With inflation reaching 8.6 percent last May, the highest since 1981, all prices in the United States have risen, and the Federal Reserve hopes that raising interest rates will slow economic growth and ease prices, and indeed, the markets have ‘ a decline seen several weeks after they began implementing a previous decision by the Federal Reserve on Monday to raise interest rates, entering the “bear market” stage, a designation given to markets that saw a decline of 20 percent or more compared to a previous increase.

But according to the Wall Street Journal, money markets jumped after the Federal Reserve’s decision on Wednesday, as the “S&P 500” index rose 1.4 percent, the Dow Jones Industrial Average by 274 points, or 0 , 9 percent, and the Nasdaq index rose 2.3 percent.

How does raising interest rates reduce inflation?

By raising interest rates, the Federal Reserve wants to keep consumers from making big purchases and reducing the amount of barter, and the goal is to reduce demand over time to bring prices down and stabilize, according to the Washington Post. .

This ability to set interest rates is one of the most important tools the Federal Reserve has to control the U.S. economy, as lowering it makes loans cheaper, which encourages spending and investment.

During the pandemic, when private and government enterprises and schools came to a standstill, the Federal Reserve lowered interest rates to almost zero percent, a tactic many central banks used after the economic crisis that began in 2007 to 2009.

It has helped make it easier for people to buy large properties such as cars and homes, but with the exit from the recession caused by the Covid-19 pandemic, in addition to the distraction that still affects businesses and consumers, says the newspaper that the Federal Reserve has raised the interest rate instead of lowering it to slow spending rates. .

How do federal funding rates affect the world?

The Wall Street Journal said in a report on Wednesday that the decision would expand its impact on the financial world and affect the money and financial decisions of millions of Americans, whether large or small.

Federal funding rates are the ratio that determines the interest rate that banks deal with each other in terms of lending and lending, and although it does not change directly to consumers, it does affect lending rates on a daily basis, says Chester Spatt, a professor at the Carnegie School of Business. Mellon told CNBC: “We are definitely going to see the cost of borrowing rise very fast.”

Markets are expected to see between nine and ten decisions to raise federal interest rates from now until the year 2023, according to the U.S. network, at a rate of 50 basis points during the remaining three meetings of the Federal Committee, and the percentage of the total increase will be about 4 percent.

CNBC has outlined three ways in which the Federal Reserve’s decision, Wednesday, could affect global markets, which is either a global recession, a recession in profits and similar decisions by central banks around the world.

global recession

And the network declares that the Federal Reserve’s decision could cause ripple effects across the world economy, noting that the announcement of high inflation, on Friday, led to a sell-off of shares over a few days around the world.

“US inflation, recorded on Friday, has contributed to an impact on markets worldwide, and it seems appropriate because the Federal Reserve is to some extent a global central bank,” Christina Huber, Invesco’s strategic analyst, told CNBC . It could certainly cause a global recession. ”

But Huber expressed her optimism that the United States would be able to avoid a recession and that the Federal Reserve “would succeed in bringing about a soft landing” by carefully locating and responding to data, adding that the US economy at the same time “clearly on the way” to a “major slowdown,” and that “Silent landing” has become difficult to implement.

She noted that “delaying (the economy) in reducing inflation without causing a recession is a very sensitive process because monetary policy is a heavy instrument, not a surgical instrument, so the risks of recession have definitely increased “with the rise in inflation indicators.

Well-known economic analyst Kenneth Rogoff warned last April that the US recession, especially if stimulated by a cycle of high interest rates, would affect global import demand and wreak havoc in financial markets.

Dominoes of central banks

The European Central Bank last week confirmed a plan to raise interest rates by 25 basis points, at a meeting expected in July, amid expectations to reveal another increase in September.

But after the Federal Reserve’s announcement on Wednesday, the European Central Bank held an emergency meeting, which coincided with the rise in bond yields of many governments in the European Union.

Stephanie Meunier, investment officer at Swiss bank “lombard odier”, said in an interview with “CNBC” on Wednesday that the European emergency meeting after the Federal Reserve’s announcement has “tremendous” implications.

“This probably means to some extent that they are afraid that the Fed will cause sharp rises, such as the 75 basis points they expected, as well as affect risky assets in the markets, and this could mean even more disruption for European sovereign bond markets. ., ”She added.

In an interview with the same network, Kartzen Bezeski, the international head of mega-projects at the Dutch bank “ING”, said that the currency implications of the Federal Reserve’s decision could encourage European financial policymakers to make changes.

“This clearly means that we can see a stronger dollar, and therefore a weaker euro, which has already kept officials at the European Central Bank busy,” he added.

He stressed that “if we want to achieve parity, then I think the weaker euro, even if it is not the target that the European Central Bank wants to achieve, but it certainly increases the pressure associated with inflation, and therefore it’s a concern. ”

Jeffrey Yu, a specialist in market strategies at BNY Mellon, points out to the same network that “the US economy is not sensitive to the tightening of financial conditions caused by changing exchange rates compared to economies that are heavily dependent on carpentry, we look to countries such as Switzerland, Japan and even the European Union, in addition to many emerging markets.

“International goods are priced in dollars, and from their point of view a stronger dollar in this (economic) environment is not in their favor at all,” he added.

Profit stagnation

In addition to the possibility of a global economic recession, investors should also be wary of the coming “earnings slump,” Jay Steer, head of emerging markets and credit research at Societe Generale, told CNBC.

Steer stressed that the trend of increasing profits over 25 years as a percentage of GDP is “fairly over” due to the ongoing issues of deglobalization, rising energy and input costs and rising wages.

Supply chain problems and costs due to the war in Ukraine and geopolitical differences have also exacerbated the threat to businesses of higher tariffs.

“I think it does not matter what happens in terms of the economic outlook – and yes, the likelihood of a recession is increasing – the likelihood of an earnings recession is growing faster,” he added.

Impact of the decision on the American consumer

The Wall Street Journal quoted experts as warning American consumers to think about how to spend their money, in addition to getting rid of high-interest credit card debt.

The higher interest rates confirmed by the Federal Reserve will mean that annual percentage rates, known briefly as “APR”, will also rise.

Higher interest rates mean the cost of borrowing is higher and nowhere is this more true than credit card debt, according to the newspaper, which reported that fears of inflation and the threat of recession could make people hesitate to use savings or other funds to pay off debt.

But Peter Gallagher, founder and managing director of the consolidated retirement planning group at Briarcliffe Manor, told the newspaper that doing so now will save significant money in the future that can be spent on interest.

Experts also recommend using high-interest savings accounts to take advantage of high interest rates, in addition to postponing decisions on large purchases, such as cars or real estate.

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