On Wednesday, the Federal Reserve raised short-term interest rates by 0.5% to 1.00%, marking the largest increase in over two decades as it attempts to fight the ever-increasing inflation that has continued to cause financial burdens for Americans.
Since 2000, the Fed has only raised interest rates in increments of 0.25%. “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the Fed said in a FOMC statement. “The Committee is highly attentive to inflation risks.”
In March, inflation rates rose to 8.5%, up 0.6% from February’s 7.9% and 1.5% from December’s 7%. It’s now the highest inflation rate the country has seen since the 1980s, though forecasts project a downturn over the coming months. The increased interest rates will take time to lower the inflation, however.
The Fed explained it’s monitoring the situation of the 10-week-old Russian invasion of Ukraine — citing “tremendous human and economic hardship” — among other global issues that have essentially stalled production and sent the supply chain spiraling.
“The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions.”
As for what this all means for the average citizen, borrowing will become more expensive. Higher interests rates will occur for mortgages, student debt, car loans, credit cards, and business loans for both small and large companies.
Higher mortgage rates are a particularly hard pill to swallow for those in the already difficult-to-navigate real estate market, as home prices alone have shot up during the COVID-19 pandemic. In the first quarter of 2021, the average home sold for $507,800.
Currently, a 30-year fixed-rate mortgage rate sits at over 5%, up from 3.10% in early-December and 4.16% in mid-March. The Fed will now discuss increased interest rates between 0.75% to 1.00% in June and July, while some officials have advocated for raising rates to 2.5% by the end of 2022.
Following the Fed’s announcement, the Dow Jones Industrial Average spiked up 900 points to 34,064 before dropping 1,000 points Thursday morning, or 2.9%. The S&P 500 saw a 3.3% drop, while the Nasdaq Composite fell 4.6%. Similarly, Google’s parent company, Alphabet, had a 5.3% slide.
Speaking Wednesday, Fed Chairman Jerome Powell attempted to relay that the bank understands the financial hardship Americans are going through, and explained the raising interests rates were done in order to relief that inflation tension. “Inflation is much too high, and we understand the hardship it is causing,” Powell said.
Powell also emphasized his belief that the economy can withstand the higher rates, with unemployment rates dropping by 0.2% from February to March and total job openings rate at 7.1%, a year-over-year increase of 1.6%. “Nothing about it says it’s close to or vulnerable to a recession,” he said.
President Joe Biden has previously supported the Fed’s monetary decisions. “The Federal Reserve provided extraordinary support during the crisis for the previous year and a half,” he said back in January. “Given the strength of our economy and pace of recent price increases, it’s appropriate — as Fed Chairman Powell has indicated — to recalibrate the support that is now necessary.”
The actions aren’t without concerns, however. As the Associated Press notes, many have criticized the Fed for taking too long to tackle inflation, leading to doubt from analysts that a recession can ultimately be avoided.
Andrew Rhoades is a Contributing Reporter at The National Digest based in New York. A Saint Joseph’s University graduate, Rhoades’ reporting includes sports, U.S., and entertainment. You can reach him at firstname.lastname@example.org.