[NEWS] – FED raises interest rates to highest level since 2008

On September 21, after a two-day meeting, the FED decided to raise the introductory interest rate by 0.75 percentage points (75 basis points) for the third time in a row, and the fifth rate hike of this year. The primary interest rate band was raised to range from 3 to 3.25%, the highest since January 2008.

Painful remedies

Inflation in the US has risen to a 40-year high, and the Federal Reserve (FED) has had to continue to raise interest rates to cope. But this may not be their last rate hike this year.

Fed Chairman Jerome Powell declared, "We have to win against inflation. I wish there was a painless way to do this. But there isn’t," Mr. Powell told reporters, amid the Fed’s strangeness. The inflation rate is expected to drop to around 2% by 2025.

The Fed has raised the base rate 5 times this year, from near zero to more than 3% today. Fed policymakers expect interest rates to rise to around 4.4% by the end of this year and 4.6% by the end of next year.

With a rate hike, the Fed will make it more expensive to get a mortgage, car, or business loan. Consumers and businesses will then be able to borrow and spend less, thereby reducing inflation. But this will also slow down economic growth.

Currently, rising commodity prices are putting pressure on American families and businesses, and pressure on US President Joe Biden as the US is about to enter the midterm elections in early November.

Economists fear a sharp Fed rate hike over time will lead to rising unemployment and a full-blown recession later this year or early next year. They also assume that US GDP will have to grow negative for at least a short period of time in the first half of 2023 before inflation begins to fall.

In a statement last month, Fed Chairman Jerome Powell acknowledged that the Fed’s rate hike would "cause some pain" for households and businesses.

Global influence

The move of the US central bank affects the rest of the world, the Financial Times reported on September 22. The Fed’s interest rate hike will cause the US dollar (USD) to appreciate against most other currencies, including the Vietnam dong, putting great pressure on the USD/VND exchange rate.

The Fed’s rate hikes will exacerbate inflation elsewhere by raising the prices of dollar-denominated goods. In addition, countries with a lot of debt in USD will have a harder time due to increased debt and they may also have to consider raising interest rates to protect the local currency.

The Financial Times warns a "reverse currency war" is underway as countries try to make their currencies stronger. This week, for example, the Swedish central bank announced its biggest interest rate hike in nearly three decades, increasing it by 100 basis points to 1.75% to curb inflation.

On September 22, the Bank of England also raised interest rates to 2.25%, the highest since 2008.

Last week, the World Bank warned that despite the need to crush inflation, raising interest rates risks pushing the global economy into a devastating recession, leaving the world’s poorest countries at risk of collapse.

The World Bank describes the situation today as similar to that of the early 1980s. At the time, global interest rates skyrocketed and world trade shrank, sparking a debt crisis in Latin America and triggering a wave of disruptions. debt in sub-Saharan Africa.

Thanh Long