Interest Rates are Increasing to Combat Inflation: Here’s Why

(Image taken from: www.forbes.com)

Staff Writer: Julian Cassady

Email: jcassady@umassd.edu

On November 2nd, 2022, the Federal Open Market Committee (FOMC) confirmed that they will be hiking interest rates by 0.75%. This article explains how the interest rate hike will affect inflation.

Before going into details on the interest rate increase it’s important to clarify what the FOMC is, what purpose it serves, and who are the members of the committee.

The FOMC is a branch of the Federal Reserve Bank. The Federal Reserve Bank or, “The Fed,” was created to provide the United States with a safe monetary and financial system.

Monetary policy decisions such as when to put more money into circulation are determined by The Fed. Note that The Fed isn’t responsible for physically printing new money, that is the job of the U.S. Mint

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The FOMC is composed of twelve members:

Jerome Powell – Chair of the Federal Reserve Board

Lael Brainard – Vice-Chair of the Federal Reserve Board

Michelle Bowman – Member of the Federal Reserve Board

Lisa Cook – Member of the Federal Reserve Board

Philip Jefferson – Member of the Federal Reserve Board

Christopher Waller – Member of the Federal Reserve Board

Michael Barr – Member of the Federal Reserve Board

John Williams – President of the Federal Reserve Bank of New York

James Bullard – President of the Federal Reserve Bank of St. Louis

Susan Collins – President of the Federal Reserve Bank of Boston

Esther George – President of the Federal Reserve Bank of Kansas City

Loretta Mester – President of the Federal Reserve Bank of Cleveland

The FOMC meets privately eight times each year to evaluate short-term policy choices. A press conference is then held by the chairman of the Federal Reserve Board to discuss details of the meeting.

These meetings usually consist of deliberation about the current state of the economy as well as brainstorming short-term ways to fix the situation.

Wall Street keeps a keen eye on these meetings to predict which way the market will turn in. The post-meeting press conferences take place during trading hours, and the market can become incredibly volatile as investors scramble to make sense of the news.

Now that we know everything about the Federal Open Market Committee, we can dive into what interest rate hikes mean and how they affect inflation.

According to Fool.com, interest rates are: “known as the federal funds rate, [which] is the interest rate at which banks and credit unions borrow from and lend to each other. It’s determined by the Federal Reserve and can be changed at any time. Changes to this rate impact consumers because they can influence the interest rates on credit cards, loans, and savings accounts to varying degrees.”

Rising interest rates make using your credit card riskier. The longer it takes you to pay off your credit card, the more you may have to pay as those interest rates increase.

Rate hikes might also make getting a business loan more difficult, which stifles economic growth and social mobility.

Adjustments in interest rates are necessary to ease the severity of recessions and to prevent drastic economic booms that could crash and collapse the economy all at once.

Raising interest rates helps to combat excessive inflation by increasing the cost to borrow money. When the cost to take out credit goes up, fewer people are borrowing which causes inflation to decrease over time. 

Although the economy seems rough right now, there is a light at the end of the tunnel that will be reached thanks to the Federal Open Market Committee.  

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