US interest rate likely to hit 3.4% by the end of 2022. What does it mean?

16 Jun 2022 , 12:55 PM

US central bank, the Federal Reserve, increased the federal funds rate by 0.75% yesterday. This is the highest one time interest rate hike since 1994. Federal funds rate is the rate that banks can charge from other banks and financial institutions for lending overnight any excess cash that they have over their required cash reserve requirements. This interest rate serves as a kind of benchmark interest rate in United States. Interest rate charged on consumer and business loans is tied to this federal funds rate. So if this rate is increased, interest rate on these loans will also increase. After this increase, the federal funds rate now stands at between 1.50% and 1.75%.

The Federal Reserve yesterday also said that another interest rate hike between 0.5% and .75% is expected next month. Given the current high rate of inflation, it is very likely that these hikes will continue till December at least. After July, Federal Reserve may go for three more hikes of .25% till December. That is likely to push Federal Funds Rate to 3.2%.

In its report yesterday, the Federal Reserve identified three main causes of high US inflation – 1) Demand and supply disuptions caused by Covid lockdowns and restrictions; 2) higher energy prices; 3) broader price pressure.

With these interest rate hikes, US economy is all set to enter a slowdown. There is a good chance that US economy may enter recession. Recession happens when GDP growth turns negative and the economy starts contracting. US is the biggest importer of goods and services from a large number of countries. Slowdown or Recession in US will bring down US imports from these countries. This will have an adverse impact on the economy of these countries. Overall it can be said that the slowdown in the entire global economy is set to worsen further in the coming days because of worsening economic situation in US.