Why does the Fed raise interest rates?  And how do the slow inflation hikes?

Why does the Fed raise interest rates? And how do the slow inflation hikes?

Americans are still grappling with higher food, gas and rent costs.

Although inflation moderated slightly in August, it is still elevated. The release of the Consumer Price Index this month showed that inflation rose 8.3% last month compared to the same time last year.

At its last meeting in July, the Fed raised interest rates by 0.75 percentage points to narrow the federal funds target range to 2.25% to 2.5% in an effort to keep inflation at bay. It also raised rates by 0.75 percentage points in June, marking the biggest increase at a single meeting since 1994. A similar hike is expected when the Fed meets again this week given the disappointing August CPI report and strong jobs. growth is pushing wage increases up.

But why are hikes used to fight inflation, and how do they work?

WASHINGTON, DC - JULY 27: US Federal Reserve Board Chairman Jerome Powell pauses during a news conference following a meeting of the Federal Open Market Committee (FOMC) at Federal Reserve headquarters, July 27, 2022 in Washington, DC.  Powell announced that the Federal Reserve is raising interest rates by three quarters of a percentage point.  (Photo by Drew Angerer/Getty Images) XMIT ORG: 775845047 ORIG FILE ID: 1242147034

WASHINGTON, DC – JULY 27: US Federal Reserve Board Chairman Jerome Powell pauses during a news conference following a meeting of the Federal Open Market Committee (FOMC) at Federal Reserve headquarters, July 27, 2022 in Washington, DC. Powell announced that the Federal Reserve is raising interest rates by three quarters of a percentage point. (Photo by Drew Angerer/Getty Images) XMIT ORG: 775845047 ORIG FILE ID: 1242147034

When will the Fed announce the next rate hike?

The Fed is expected to announce another hike by the end of its Federal Open Market Committee meeting on Tuesday, September 20 and Wednesday, September 21. The FOMC is the body within the Fed that determines monetary policy, including interest rates. Further committee meetings are scheduled for November and December.

How does a Fed hike work? How does it affect prime rate, 10 year Treasury bond?

As the country’s central bank, the Federal Reserve is in charge of monetary policy. Its dual mandate is to “promote maximum employment and stable prices in the US economy.” Stable prices mean keeping inflation under control, with a long-term average annual target of 2%.

In 2020, CPI inflation was 1.4%. In 2021, it was 7%.

One of the Fed’s main tools to influence inflation is the federal funds rate, which is the rate banks charge each other for overnight loans.

Although the Fed does not directly control all interest rates, when it raises the federal funds rate, most other interest rates eventually follow suit, including adjustable rate mortgages, credit cards, home equity lines of credit , and other loans. Some of these are tied to the prime rate, which is based on the federal funds rate, according to Bankrate.com.

A rising federal funds rate also affects the 10-year Treasury bond, which affects mortgages.

It then becomes more expensive for consumers to borrow money, who consequently spend less. Demand starts to wane and inflation, in theory, starts to creep up.

Meanwhile, some Americans, especially the elderly, are seeing higher bank savings rates hit their coffers.

How many times does the Fed raise interest rates in 2022?

The Fed has raised interest rates four times this year. The pandemic shutdown of the economy kept rates close to zero before the Fed increased rates by 0.25 percentage points in March, the first hike in more than three years.

May saw a further increase of 0.50 percentage points, followed by a historic increase A 0.75 percentage point bump in June, and then another 0.75 jump in July, putting the rate at its current range of 2.25% to 2.5%.

How much will the Fed raise rates?

Economists surveyed by Bloomberg predict a third consecutive 0.75 percentage point hike this week. That would bring that rate range to 3% to 3.25%. The same economists surveyed predicted the upper end of the range would reach 4% by the end of the year.

Are interest rate hikes good for stocks?

Interest rate increases cause volatility in the stock market. Expectations of higher interest rates tend to lower the value of future earnings, according to the U.S. Bank, making investors less willing to bid on stock prices.

Higher interest rates are meant to slow the economy, which could stunt companies’ revenues, which could hurt their growth and stock prices, according to Forbes.

Contributing: Paul Davidson, Medora Lee

This article originally appeared on USA TODAY: How Fed hikes work and why the Fed uses them to fight inflation

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