The Federal Reserve has recently signaled that there may be a potential interest rate hike in the near future. This announcement comes in response to the rebounding US economy as well as concerns about a possible uptick in inflation.
The Federal Reserve has kept its benchmark interest rate at near zero since the COVID-19 pandemic started in March 2020 in order to stimulate the economy. However, as the United States begins to recover from the economic downturn caused by the pandemic, inflation concerns have increased, leading the Federal Reserve to reevaluate its stance on keeping the interest rate at historic lows.
At its June 15-16 meeting, the Federal Reserve maintained its current monetary policies but indicated that a rate hike may be on the horizon. The meeting minutes stated that “most participants” of the Federal Reserve believe that it may be appropriate to begin raising the interest rate in 2023. This is a change from their previous stance which had indicated that rates would likely remain near zero until 2024.
This potential rate hike would mean that borrowing would become more expensive for consumers and businesses, thereby slowing down the economy. However, it could also help to curb inflation, which has already been on the rise. The Consumer Price Index, which measures inflation at the consumer level, increased 5% year-over-year in May, its greatest increase since 2008.
The Federal Reserve’s next meeting is scheduled for July 27-28, and many economists expect that they will provide further clarity on their plans for interest rate hikes at that time. Faced with the twin challenges of recovering from the pandemic and controlling inflation, the Federal Reserve has a difficult balancing act ahead of them.
In sum, the potential for an interest rate hike in the near future signals the Federal Reserve’s increasing concern about inflation as the economy rebounds from the pandemic. While this could slow down the economy, it could also help to control inflation and prevent long-term economic damage. We will have to wait and see how the Federal Reserve balances these competing priorities in the months and years to come.