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The United States Federal Reserve has raised its key interest rate by 0.75% in the most significant hike in nearly three decades. The Fed seeks to stem soaring inflation, placing tremendous pressure on US families. Inflation has risen rapidly over the past year due to supply chain problems caused by the coronavirus pandemic and Russia's invasion of Ukraine. But with the global economy still struggling, the decision to increase interest rates comes at a critical time.
This aggressive hike will be the fourth this year and the third in as many years. Not since 1994 has the central bank raised its key rate by that much all at once. But raising rates too fast could kill the economy and slow spending, which would lead to higher unemployment and layoffs. As a result, the Fed must tread carefully to avoid causing more harm than good.
In a statement, Fed Chair Jerome Powell acknowledged that tightening monetary policy would result in job losses and increase unemployment to 4.1% from the current 3.6%. However, the Fed is also attempting to keep inflation at 2% or lower, as the Federal Reserve's goal is. "There's a path for us to get there," Powell said Wednesday, referring to a soft landing. "It's not getting easier. It's getting more challenging," he said.
However, the latest move came after bad inflation news late last week, sending US stock markets into a tailspin. And it presented the Biden administration and Fed with a potentially escalating crisis.
Consumer prices rose 8.5% in March compared to a year ago. According to the Consumer Price Index, food and energy prices continued their sharp increases, and overall costs rose by 6.6%. That's the fastest rate of inflation in more than four decades. Yet, despite these recent increases, inflation remains low compared to previous years. Inflation is still running at a healthy pace, however.
Rising prices are eating away at wage gains and have become the US economy's biggest challenge. While government aid and ultra-low interest rates spurred demand, shortages of raw materials and workers worsened inflation. But it wasn't only a problem for Americans. Several surveys showed that rising prices are the number one issue on their minds. As a result, the Fed is trying to reduce the pace of rising prices by raising interest rates.
As a result, many economists are claiming that the Fed's policy will cause a recession and prolonged layoffs. While this is true, a government shutdown might cause the economy to slow down. This could result in companies laying off workers to fill these vacancies. That may seem like a good thing, but it could also create a downward spiral, causing millions of Americans to lose their jobs and homes.
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