Largest Interest Rate Spike Since 1994, And More Rises Are Expected

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Published by GreenSprout Experts | 07-07-2022

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On Wednesday, June 15, 2022, the Federal Reserve announced the largest interest rate spike since 1994, hoping to slow the current rise of inflation as it puts pressure on the US economy.

The actual increase was a full three-quarters of a percentage point in the rate. This was not a surprise, as the Fed has been warning of upcoming interest rate increases in recent months.

Between domestic factors, such as rapid economic growth and the low cost of lending, and international factors, such as the war in Ukraine, many different causes have led to this increase.

Federal Reserve Chairman Jerome Powell was quoted as saying, "We thought that strong action was warranted at this meeting, and we delivered on that. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all. … The current picture is plain to see: the labor market is extremely tight, and inflation is much too high.”

What does this mean for you?

As a result of the interest rate increase, the costs of loans, mortgages, and business investments will go up. The economic growth should slow down slightly, and consumer spending should also fall. As prices rise, demand for goods and services should also drop, usually bringing lower prices as well.

Not everyone is enthusiastic about the Fed's move, though, as some are concerned that the spike will be too much and in turn cause a wave of layoffs, and even the possibility of a recession.

If a recession does hit, we could potentially be looking at increased unemployment and less economic growth.

Powell responded, "We don’t seek to put people out of work, of course. We never think too many people are working and fewer people need to have jobs, but we also think you really cannot have the kind of labor market we want without price stability. We have to go back and establish price stability."

The Fed was very clear that it intends to enact further interest rate increases in the coming months as necessary to continue the battle against inflation.

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