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Wednesday, October 5, 2022

After an Interest Rate Warning, US Stock Markets Fell

Stock markets in the US ended the week sharply down following tough comments by the head of the country's central bank, the Federal Reserve

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Sadaf Hasan
Sadaf Hasan
Aspiring reporter covering trending topics

UNITED STATES: To prevent inflation from becoming a persistent feature of the US economy, the bank’s chairman, Jerome Powell, said the bank must continue to hike interest rates.

Markets fell 3% as a result of his statements, sending US stocks into a free fall. It happens when prices for necessities are rising for Americans. The biggest economy on earth is seeing its highest inflation rate in four decades.

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On Friday, during a much-anticipated address at a conference in Wyoming, Powell stated that the Federal Reserve might keep interest rates high “for some time” and would likely impose additional rate hikes in the upcoming months.

He stated during the Jackson Hole meeting that “reducing inflation is likely to need a protracted period of below-trend growth.”

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Investors worry that if economic growth slows, rising interest rates will make recession more likely.

Powell acknowledged that bringing inflation under control would cost American businesses and households, but he insisted that the expenditure was worthwhile.

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While slower GDP, higher interest rates, and a softer labour market may help to reduce inflation, he added, “they will also hurt households and companies.”

These are regrettable costs of lowering inflation, but much more suffering would result from failing to restore price stability.

Powell wants to stop inflation from getting out of control. That simply means that people will change their behaviour by their beliefs, creating a self-fulfilling prophecy if they anticipate significant inflation. For instance, someone who anticipates a 3% increase in prices next year is more likely to demand a 3% increase in pay.

When it happened before, Powell’s predecessor, Paul Volcker, had to slam on the breaks, substantially hiking interest rates and plunging the economy into recession.

The Federal Reserve’s benchmark interest rate was almost zero in March, but it has since been increased to a range of 2.25% to 2.5% in a bid to combat inflation.

The Fed bases its current policy on a lesson learned from the past.

Powell noted that the inflation of 40 years ago teaches the current Fed three lessons: that managing inflation is the responsibility of central banks like the Fed, that managing expectation is important, and that “we must keep at it until the job is done.”

Powell pointed out that the Fed’s inaction in the 1970s contributed to the persistence of high inflation expectations and the drastic rate increases in the early 1980s. In that instance, Paul Volcker, the then-Chairman of the Fed, caused a recession to control inflation.

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