![]() The goal for the Fed is to stop high inflation without potentially plunging the economy into a recession.Īccording to Fed chair Jerome Powell, the Fed continues "to anticipate that ongoing increases in the target range for the federal funds rate will be appropriate" to reach its inflation target rate of 2%. This demand has outpaced the ability of businesses to deliver, putting upward pressure on prices.īy raising rates, the Fed is hoping to cool off demand by making it more expensive to borrow money. Inflation is still near a 40-year high, driven by strong consumer demand for both goods and services. The Fed has been aggressively raising interest rates in an effort to fight high inflation. This leaves people, businesses, and banks in a dangerous position when the economy inevitably slows down. When rates are low and people feel good about the economy, consumers often take on excessive debt, and lenders may even lend too much money to unqualified borrowers. It's easy to understand why the Federal Reserve would want to stimulate the economy, but it can be harder to understand why they might want to slow it down - isn't economic growth good? Simply put, what goes up must come down, and the higher the economy climbs, the further it can fall. The Federal Reserve typically raises the interest rate when the economy is strong. This means consumers and banks are borrowing and spending less, which can cause the economy to slow down. When the Federal Reserve interest rate is high, banks are discouraged from borrowing from each other, and the supply of cash in the economy decreases. Why the Federal Reserve raises interest rates That's why you'll typically see the Federal Reserve start to lower the interest rate when economists are concerned about an oncoming downturn - and then more aggressively in the midst of a downturn. In turn, it becomes easier and more affordable for both consumers and businesses to borrow money, which boosts consumer spending and encourages businesses to expand, hire more workers, and increase wages.Ĭutting interest rates stimulates the economy and drives economic growth, making it an appropriate tool to prevent and ease severe economic downturns. When the Federal Reserve interest rate is low, there's more cash in circulation and banks are able to borrow from each other more freely. Why the Federal Reserve cuts interest rates Adjustments in this rate aim to smooth the ups and downs of the economy, easing the severity of recessions and preventing economic booms that can lead to market crashes and excessive inflation. The federal funds rate is one of the primary tools the Fed has at its disposal to do this. It raises interest rates when the economy is strong to keep businesses and consumers in check. The Federal Reserve lowers interest rates to stimulate the economy leading up to and during economic downturns. In other words, the dollar doesn't go as far with high inflation. ![]() When inflation is low and stable, people can hold money without worrying about high inflation eroding purchasing power. Price stability means that inflation remains low and stable over the long run. One of the primary responsibilities of the Federal Reserve is ensuring price stability. The Federal Reserve exists to promote a safe and strong economy, which includes maintaining healthy employment rates, stable prices, and reasonable interest rates. Meanwhile, high interest rates discourage spending from both consumers and businesses by increasing the cost of borrowing, leading to reduced economic activity. Low interest rates can stimulate the economy by making it easier for people and businesses to borrow money for major purchases and investments, leading to increased economic activity. The federal funds rate is what banks charge each other for overnight borrowing, but it also impacts many business and consumer debt products. Interest rates can have a significant influence on the economy. How do interest rates affect the economy? Inflation has eased somewhat from its 9.1% high in the summer of 2022, but still remains elevated. According to its recent statement, the Fed's overarching goal is to return inflation to its 2% objective. Interest rates are at their highest since October 2007, pushing borrowing costs to a 15-year high. In 2022, the Fed raised rates by 4.25%, including four consecutive hikes of 75 basis points, making these hikes the fastest cycle in history. ![]() The Fed decided to raise interest rates by 25 basis points. On March 22, the Fed raised interest rates by 0.25%, the ninth rate hike since the Fed began raising rates last March. The current Federal Reserve interest rate, or federal funds rate, is 4.75% to 5.00% as of March 22, 2023.
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