/ world today news/ The US Federal Reserve raised the key interest rate to a record five percent and does not rule out reducing assets on its balance sheet. The US central bank hopes this will reduce inflation and unemployment. How will the new financial policy affect ordinary citizens?
Fighting inflation
The prime interest rate determines the minimum cost of debt obligations, therefore, as it increases, loans always become more expensive. This will affect both the work of banks and the lives of ordinary people. Cheap loans are the backbone of the American economy. In an attempt to bring inflation down to the target level, the Federal Reserve is doing serious damage to the established financial system.
The American banking sector is already experiencing difficult times, and the decision made threatens a recession. Experts believe that after Silicon Valley Bank and Signature Bank, many holders of depreciated bonds are at risk of bankruptcy. For example, Lawrence McDonald, former vice president of the financial corporation “Lehman Brothers”, expects a sharp decline in economic activity and GDP in the coming months, as well as a wave of layoffs.
In mid-March, the Moody’s rating agency issued a negative forecast for the US banking system. Analysts point out that a sharp shift to high interest rates and a tightening of monetary policy will significantly complicate the operations of financial institutions, while rising deposit costs will reduce profits.
Economist Leonid Khazanov notes that both industry and the consumer sector will suffer. “It will be more difficult for enterprises to attract loans, for the population to buy goods on credit. This, in turn, could lead to a decline in purchasing activity in the US and lead to stagnation of the entire US economy,” explains the expert.
An unattainable dream
More and more Americans can’t afford tuition, their own home, or even rent. The Guardian reports that from 2019 the number of homeless in the capital of California – Sacramento, with half a million people, has increased by 70% and is approaching ten thousand people. The crisis is gaining momentum across the country. Portland Mayor Ted Wheeler spoke of eight hundred unauthorized encampments. The city commissioner reports that there are fewer and fewer students in public schools, people are leaving with their entire families due to a sharp rise in crime. And according to the New York Post, in Washington, D.C., the number of illegal encampments has grown to 120 in the past two years.
At the same time, real estate prices soared: the average price of a house in Sacramento exceeded $500,000. The monthly rent will cost almost three thousand. For most middle-class families, this is too expensive. Local authorities are trying to find a compromise between providing assistance to the homeless and protecting citizens.
“A particularly dangerous trend is the increase in the number of homeless people over 65: due to high rents and inflation, many pensioners cannot pay their rent and at the same time buy the necessary medicines and products. This is a clear proof of the lack of effective social policy in the USA”, says Khazanov.
The new policy will exacerbate the problem. Mortgages are becoming unaffordable. Even with a base interest rate of 4.75%, the cost of real estate loans reached a 20-year high of 6.92%.
However, President Joe Biden says that nothing threatens the country’s banking system and the measures taken will practically eliminate the risk of a crisis. He is confident in the professionalism of Federal Reserve Chairman Jerome Powell, who hopes to reduce costs by increasing the key rate.
It is noteworthy that this opinion is not supported by either business analysts or politicians. Louisiana Senator John F. Kennedy is convinced that the decision will harm millions of people and put many out of work.
Alexander Razuvaev, a member of the Supervisory Board of the Guild of Financial Analysts and Risk Managers, considers the leadership of the Federal Reserve to be theorists who are unable to critically assess the situation. “They only care about inflation and operate on the general rules, even though it’s almost impossible to beat with an increase in the interest rate,” he explains.
“Given the accumulated problems of the US financial system, it will not be possible to achieve inflation of two percent either in the short term or in the long term,” confirms Khazanov. “On the contrary, it may accelerate due to higher energy prices and then clearing the balance sheet of the Federal Reserve will not help”, the expert is convinced.
According to the Federal Reserve’s design, raising the key interest rate would strengthen the dollar, which should lead to lower oil prices, economists said. However, the plan may not work. OPEC countries reacted extremely negatively to the prospect of introducing a ceiling on fuel prices and the US attempt to secure it with the relevant law. For example, Saudi Arabia has said it is ready to cut production and completely cut off supplies to countries that have accepted the restrictions. Oil will rise in price around the world, and inflation in the US will accelerate even more.
Translation: V. Sergeev
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How could the Fed’s interest rate hike influence savings rates for ordinary Americans, and do you believe this will encourage more people to save or invest?
As the Editor of world-today-news.com, I would like to share the following interview questions about the Fed’s decision to raise the key interest rate and its potential effects on ordinary citizens:
1. How do you feel about the US Federal Reserve’s decision to raise the key interest rate to a record five percent? What impact do you think this will have on the US financial system and the economy as a whole?
2. What are some potential risks associated with this policy, particularly for the banking sector and average Americans?
3. What are the advantages and disadvantages of the Federal Reserve reducing its balance sheet as part of this policy?
4. Many experts have expressed concern that the new policy could lead to a recession or even a housing market crash. Do you agree with this assessment? Why or why not?
5. How do you think the new policy will affect borrowing costs for individuals and businesses?
6. The article mentions that rising interest rates may exacerbate the problem of homelessness in major cities like Sacramento and Washington D.C. Can you elaborate on this issue and discuss potential solutions?
7. Given the current state of the US housing market, with record-high home prices and rising rents, how do you see the new policy affecting affordable housing for middle-class families?
8. Some politicians have criticized the Federal Reserve’s handling of the situation, suggesting that they are ignoring the realities on the ground. What is your take on this criticism, and who do you think should be held accountable for the economic challenges facing the country?
9. The article also touches upon the global oil market and its reaction to the Federal Reserve’s policies. How do you see the relationship between oil prices and inflation, and what impact could this have on energy costs for consumers?
10. what do you think needs to be done to address the underlying issues contributing to inflation and the cost of living crisis in the US? Should the government implement alternative policies, or is the Federal Reserve’s strategy the best approach?
