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You didn’t see a lot of celebrating on Wednesday after the Federal Reserve raised its key interest rate by 0.75% for the third time in a row. Instead, the stock markets tumbled and economists warned of job losses and a weakening housing market.
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With so much bad news attached to interest-rate hikes, why does the Fed keep doing it? In 2022, the reason can be summed up in one word: inflation. Inflation — the rate at which consumer prices rise — has been growing at its fastest pace in more than four decades. In August 2022 it rose 8.3% from the previous year. The Fed hopes that its series of aggressive interest-rate hikes this year will slow that pace down.
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As The Washington Post reported, inflation happens when there’s a mismatch of supply and demand in the economy — and right now, demand continues to outpace supply due to an ongoing global supply chain crunch.
Much of this has to do with the COVID-19 pandemic, which contributed to a slowdown in production of goods and also clogged up distribution routes. Meanwhile, many consumers became flush with cash because there wasn’t much to spend it on during extended pandemic lockdowns.
Now, with the economy reopening, consumers want to spend that money, but supply can’t keep up. Because the Fed can’t do anything to fix the supply problem, it aims to slow demand through higher benchmark interest rates, which make lending more expensive on everything from cars to mortgages. The idea is that higher mortgage and loan rates will force consumers to cool their spending, bringing supply and demand into greater equilibrium.
Because inflation is so high and resilient this year, the Fed is being particularly aggressive with its interest rate hikes. A one-time increase of 75 basis points is considered aggressive enough. Three in a row is almost unheard of.
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For the near term, at least, that could mean bad news for the economy. Typically, higher interest rates lead to a slower economic growth, which usually translates into higher unemployment, NBC News reported. It cited a Deutsche Bank projection that the U.S. unemployment rate will rise nearly a full percentage point to 4.5% over the next 12 months.
For now, however, the U.S. job market remains strong, and some …….