Fed raises Interest Rates but Shows Signs of Optimism: What does this mean for You?

Lorenzo Bagnato

2 Febbraio 2023 - 12:51

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Interest rates have been raised again by the US Federal Reserve. What does this change in our daily lives?

Fed raises Interest Rates but Shows Signs of Optimism: What does this mean for You?

In a positive though widely predicted move, the US Federal Reserve raised interest rates at a slower pace than usual. It is a 0.25% raise, compared to the half-a-percentage that characterized the past months of fiscal policy.

As predicted, this move shows caution and confidence. Caution against inflation and confidence that this is the best strategy to fight it. Jerome Powell, chairman of the Federal Reserve, always admitted that his priority was fighting inflation rather than keeping economic growth.

Inflation reached its peak in June 2022, when it reached 9.2% in the United States and 10.4% in Europe. The latest data, however, showed a steady decrease in consumer costs. American inflation in December fell to 6.5% with data showing GDP growth in 2022.

However, according to Jerome Powell, it would be “premature” to celebrate a victory over inflation. Indeed, rates could even keep rising in 2023 until inflation reaches the desired level of 2%.

On the other hand, Powell also showed signs of optimism, saying that it is possible rates will remain still for a couple of quarters. Best case scenario, inflation reaches 2% at this interest rate, which will be cut starting from September.

In any case, American stocks rallied on Thursday following the Fed’s announcement. The S&P 500, the index with America’s best performing businesses, closed 1.1% higher after months of constant downfalls.

But what does this mean for the economy? What real-life impact all these numbers and percentages have?

Recession or not recession

The real fear for economists as well as normal people is that the global economy will eventually fall into a recession. This is an economic phenomenon that occurs whenever a nation’s growth stops, initiating an avalanche that eventually buries everyone.

Capitalism is based on eternal growth. As unrealistic this assumption might be, once growth is stopped people lose jobs, money, opportunities and sometimes much more.

What the Fed is doing by raising interest rates is actually driving us towards a recession. But why? Because inflation, when left untamed, can lead to even worse consequences. And to fight inflation, economic growth must be slowed down and, sometimes, stopped altogether.

Inflation occurs when there is too much liquidity circulating, hence money loses value. To regenerate this value, central banks like the Fed make money more expensive by raising interest rates. In doing so, however, they halt investments and money circulation.

In essence, the Fed must follow the rhythm of this massively complicated dance, run by billions of factors that often collide with each other.

In any case, many economists are actually hoping that a recession will be avoided. Despite interest rate hikes, GDP is growing and unemployment is decreasing. But for how long can this situation be sustained? Two more hikes? One more? Nobody knows.

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