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Fed Plans to Keep Raising Interest Rates despite Moderation in Energy Prices

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With the rise in prices in the United States, reaching an accumulated increase of 9.1% annually in June, many analysts believe that inflation has reached its peak. Therefore the Federal Reserve (FED) will not have to continue raising interest rates in the economy, which negatively impacts economic growth.

A recent report from the investment agency BlackRock stated that inflation, driven partly by energy prices, particularly oil and natural gas, will begin to moderate starting next month.

The announcement is consistent with current crude oil and natural gas prices, which have been falling sharply despite Russia’s cuts, which face sanctions after invading Ukraine.

El precio promedio de la gasolina en Estados Unidos ha bajado por 30 días consecutivos. (EFE)
The average price of gasoline in the United States has fallen for 30 consecutive days. (EFE)

The interest rates at which the Fed lends to commercial banks are the central bank’s mechanism for regulating the amount of money circulating in the economy. A rise in interest rates increases the cost of credit cards and loans to both individuals and companies; in short, it decelerates demand, thus causing prices to moderate. The problem is that as the market slows, so does economic growth.

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The fall in commodity prices for many people is a sign of a future recession. For others, it means supply-side moderation in prices. With inflation moderating and a recession looming, some analysts believe that the Fed will be satisfied and will not have to raise interest rates any time soon.

In the last month, gasoline prices have fallen for 30 consecutive days, which has meant a reduction of 44 cents a gallon for the average American. On the other hand, natural gas futures fell more than 40% during June despite sanctions on Russia.

Fed has signaled that it will raise interest rates despite the decline in oil prices

However, many analysts may be disappointed as the largest U.S. commercial bank, Bank of America (BofA), expects the Fed to raise interest rates by 0.75 basis points at the next meeting of its Board of Governors, despite declines in oil prices.

Jerome Powell ha cambiado radicalmente su postura frente a la inflación muy a pesar de la visión de la administración Biden. (EFE)
Fed Chairman Jerome Powell has radically changed his stance on inflation in spite of the Biden administration’s view. (EFE)

“We think the main takeaway from June inflation data is that underlying price pressures remain robust and unacceptably high relative to the Fed’s mandate,” reads a BofA memo leaked by the financial media Business Insider.

At its July 26-27 meeting, the Federal Open Market Committee (FOMC) is due to determine whether or not to raise interest rates in the coming period. The FOMC, in past meetings, has signaled its intention to raise the interest rate again based on 0.75 points, which would represent a reasonably aggressive hike by the standards of the U.S. economy.

In June, the Fed raised interest rates 0.75 points, making it the most significant rate hike since 1994. A further interest rate hike of that magnitude will strongly impact financial market expectations and make a U.S. recession more likely. However, the Central Bank appears willing to take the risk to contain the highest inflation the country has seen in decades.

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