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Federal funds target interest rate

Federal funds

target

Federal funds target interest rate

Federal funds

target

Federal funds

target


The Federal Reserve is trying to cool the hot US labor market. But it may be months before these efforts begin to bear fruit.

The central bank said Wednesday it would raise interest rates by half a percentage point, the largest increase in more than two decades, and begin smoothing out its bonds in a bid to curb inflation. In a press conference after the announcement, Jerome H. Powell, President of the Fed, cited the labor market, and in particular the record number of jobs in relation to the number of unemployed, as a reason why policymakers have become more aggressive in recent years. years. months.

“You can see that the labor market is out of balance: You can see that there is a shortage of labor,” Mr Powell said.

Higher interest rates should, in theory, lead to less demand from both consumers and businesses, leading companies to post fewer jobs and hire fewer employees. Mr Powell hopes this will allow the labor market to rebalance without raising its unemployment rate.

But these changes will not become apparent overnight. Interest rates take time to affect the economy and there is reason to believe that this time the process may take longer than usual. Consumers as a whole are sitting on the trillions of dollars saved during the pandemic, and many seem willing to spend it on activities that are long overdue, such as travel. This could mitigate the impact of Fed policies, said Michelle Meyer, chief US economist for Mastercard.

“The buffer out there is important to the consumer, which means it may take longer to see the impact of interest rate hikes,” he said. “The more resilient the economy and the stronger it is, the higher interest rates the Fed will have to take to see this decline in demand to curb inflation.”

However, interest rates will eventually work, Ms. Meyer said. One of the first places the Fed is likely to act is in the housing market. Mortgage rates have risen sharply, leading to a sharp drop in new mortgage applications and there are signs that sales have begun to slow. Construction activity – and construction work – will not respond as quickly, in part due to the long-term shortage of homes for sale, but eventually construction is likely to slow as well.

Processing is also likely to feel the effect of higher interest rates. But the messages could be difficult to interpret: Many economists were already expecting a slowdown in manufacturing this year as the pandemic subsides and consumers return to spending more on services than goods.

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