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Investors on Wall Street are awaiting a new hike in interest rate by the Federal Reserve (Fed), which has announced its intention to combat inflation firmly, even if this measure “brings pain” to American families, in the words of the Central Bank’s own president, Jerome Powell.
The Fed expects Wall Street to raise the interest rate by 0.75 %. In his August 26 speech in Jackson Hole, Powell made it clear that the Fed’s priority is to control inflation, which reached the highs in May in 40 years. The next rate hike will be announced at the Fed’s September 20-21 meeting.
With the rise in interest rates, borrowing costs are rising throughout the economy: credit card interest rates are rising, and the cost for companies to apply for credit is also rising. Likewise, interest rates on new home loans, car loans, and even student loans are also increasing.
In general, economic activity is reduced due to the rise in interest rates, which means a reduction in consumption, investment, and even employment.
Although the Fed has dropped the phrase “soft landing” from its language, some economists, such as former White House advisor Larry Summers, believe that a decline in inflation is possible without a significant increase in unemployment. Others more pessimistic, such as European Central Bank President Christine Lagarde, believe that controlling inflation and unemployment has been lost and economies will have to choose between holding one or the other.
Fed officials have raised interest rates at the fastest pace since the 1980s. June’s 0.75% interest rate hike was the most aggressive increase since 1994. In July, the Fed raised interest rates another 0.75%.
Although after the two summer hikes, the financial markets seemed to believe that the central bank would ease its aggressive tightening policy, after the Jackson Hole speech, that belief was dispelled.
Some Fed members, such as James Bullard, have announced their support for continued aggressive policy tightening. At a central bank meeting, Bullard told The Wall Street Journal that, “We should continue to move expeditiously to a level of the policy rate that will put significant downward pressure on inflation.”
Bank of Cleveland President Loretta Mester has joined Bullard’s view and has insisted on the need to keep raising interest rates to contain inflation. Although the U.S. has had two consecutive periods of negative growth, Mester does not believe that the economy is in recession due to low unemployment rates. However, she does not rule out this economic phenomenon becoming a latent possibility in the next two years.
Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica