Housing starts tend to decrease when interest rates are high, and people generally save more money and spend less. Credit card interest rates (because they’re variable interest rates) also move in lockstep with these changes in interest rate, so the cost of holding debt increases. This is because banks want to incentivize people to deposit money with them. Higher fed funds rates translate to higher costs for short-term borrowing and higher yields on savings products. Banks must meet reserve requirements related to how much money they have on hand, so a higher fed funds rate encourages banks to save money and give out less to borrowers. The Federal Reserve controls the fed funds rate, indirectly influencing the rate at which banks lend each other money from their reserves. If the cost of a raw material or labor increases, it can also lead companies to raise prices, effectively passing increased costs onto consumers. So sudden increases in demand or limits to supply can cause inflation. These checks gave consumers greater discretionary spending power, and the increased demand for goods and services contributed to rising prices. During the pandemic, the government sent out stimulus checks to encourage consumer spending and avoid an even worse recession. When restrictions eased and demand for gas increased, these companies had to increase prices because demand was outpacing the available supply.Īnother inflationary factor from 2022 was the circulation of stimulus money in the economy. Oil companies, for example, didn’t need to transport as much of their product around the globe since fewer people were driving their cars. What Causes InflationĪ mismatch between supply and demand is the most basic explanation of what causes inflation.įor example, when supply lines were interrupted due to the COVID-19 pandemic, some industries grew accustomed to an environment of low demand for their products. However, he did not set a timeline for when that might be, and we’ve seen two rate hikes since then in February and March 2023, both of 25 basis points. Near the end of 2022, Fed Chair Jerome Powell noted that the pace of rate increases would eventually slow. At seven of these eight meetings in 2022, the Fed decided to raise interest rates by either 25, 50, or 75 basis points. The Federal Open Market Committee (FOMC) has eight regularly scheduled meetings throughout the year. This was a pretty shocking number and the Federal Reserve took swift action to combat increased prices. Data from the Consumer Price Index (CPI) at the time indicated the annual inflation rate was at 8.5%. ![]() The Federal Reserve met on March 17, 2022, to discuss raising the federal funds rate. Investors need to know this to make smart financial moves. Higher interest rates hurt some industries while others benefit from them.Chairman Jerome Powell has indicated the potential for a slowing of the pace of increases, but nothing is set in stone and many analysts expect one more rate hike in 2023.The Federal Reserve raised interest rates by 400 basis points in 2022.
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