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How the US Fed interest rate hikes trigger global interest hikes, housing market collapses and recession

Akshata Kamath
Akshata KamathNov 04, 2022 | 08:30

How the US Fed interest rate hikes trigger global interest hikes, housing market collapses and recession

The US Fed's interest hikes reminded people of the 2008 financial crisis. (Illustration: Seemon, DailyO)

After hiking interest rates multiple times in 2022 to control inflation, the US Federal Reserve ordered another massive interest rate hike and brought interest rates to 4%. This will further influence the stock market, the housing market, and the job markets, bring a recession, and even lead the Indian and UK Central Banks to raise their interest rates.

First, the US interest rate hike: The Federal Reserve generally increases interest rates to control inflation. The philosophy is that the higher the interest rates, the more expensive it is for people to borrow from the banks and the less the people will spend. This will eventually reduce spending and prices for products will increase at a slower pace. US interest rates that were at 0.25% in March 2022 now stand at about 4% and could rise again in the coming months and reach between 4.5% to 4.75%. 

This is how interest rates were hiked during 2022:

  • May 5, 2022: 0.50%
  • June 16, 2022: 0.75%
  • July 28, 2022: 0.75%
  • September 22, 2022: 0.75% 
  • November 3, 2022: 0.75%
Historic interest rates in the US. (Photo: Fed Reserve)

    The chart above shows how interest levels in 2022 have reached the same levels that were once present in 2008 when the world reeled from the Great Financial Crisis. 

    So have inflation levels actually dropped? Nope, not significantly as of yet. As you can see, the inflation levels have stayed between 8.5 and 8.2 from March to October 2022. But if you compare this year's data with that of the previous years, 2022 has seen quite a significant rise in prices. 

    Inflation levels in the US. (Photo: US Inflation Calculator)

    The impact: This interest rate hike along with the previous hikes, will collectively cause a subsequent impact on other parts of the economy ie the stock markets, the housing markets, the job markets, and the global interest rates. 

    Federal Reserve Chair Jerome Powell. (Photo: Twitter)

    1. US stock markets: After Federal Reserve Chair Jerome Powell said that inflation was still too high and the central bank would further increase interest rates (as if the interest rates reaching a 14-year high were not enough), the US stock markets started falling.  

    • The Dow fell 1.55%. 
    • The S&P 500 shed 2.50%. 
    • The Nasdaq plunged 3.36%. 

    2. The US economy: Though higher borrowing costs are pinching US citizens, but consumers still seem to be flushed with cash (that they saved during the pandemic). Thus they continue to spend money and increase demand. Thus the Federal Reserve plans to tap the brakes harder and raise interest rates again to get people to stop spending. The interest rate hike is set to drive up rates for credit cards, home equity, lines of credit, and other loans. This is going to lead businesses to stop investing in new projects, levy hiring freezes and stop borrowing loans from banks. 

    3. The Housing markets: The interest hike is affecting mortgage home buyers as their mortgage interests have increased from 3% to 7% in six months. The fears are that a further increase in interest rates will cause the housing market to collapse, just like the 2008 crisis. Since interest rates today are as high as they were during the 2008 financial crisis, people cannot help but remember and wonder if the crisis will repeat again. 

    4. The job market: Economists had predicted that job postings in the US would fall below 10 million for the first time in 2022. But according to the Labor Department, employers advertised 10.3 million and 10.7 million job openings in August and September respectively. As so many positions are available, employees are departing and seeking employment with companies that pay more and have more significant advantages. Thus businesses have been obliged to raise wages and salary increments in order to attract and retain employees, thus increasing the impact of inflation. 

    5. Recession: Though the US is not in a recession now, the US GDP has been contracting for the last two quarters. Economists will evaluate other factors of economic activity, like employment, retail sales, and industrial production, before determining whether the US economy is in a recession. But economists do fear that the US economy could go into recession by 2023 since the interest rates are already high in 2022 and the Fed has been talking about increasing rates even further. 

    5. Other banks across the globe: As per reports by Moneycontrol, India's Reserve Bank of India (RBI) is likely to hike interest rates by 0.35 to 0.50% in the upcoming monetary policy meeting and follow in the footsteps of the US Fed. Meanwhile, the Bank of England has also announced an interest rate hike of 0.75% thus bringing interest rates to a 33-year high of 3%. This will try to bring down UK inflation, which is currently at a 40-year high.  

    Last updated: November 04, 2022 | 08:30
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