SINGAPORE: The United States Federal Reserve has made its biggest interest rate hike in nearly 30 years, as it steps on the pedal to combat surging inflation.
The move is set to have far-reaching implications beyond America, from choppy financial markets to slower economic recovery in other parts of the world and even higher borrowing costs for businesses and individuals.
In Singapore, for instance, home owners may soon feel the pinch of higher mortgage rates.
With the Fed indicating the possibility of further rate hikes, we ask the experts what that means for the economy and borrowers.
Q: Why is the US Fed increasing rates and what’s next?
US officials agreed to a 0.75-percentage-point rate rise at the end of a two-day policy meeting on Wednesday (Jun 15), bringing its benchmark federal-funds rate to a range between 1.5 to 1.75 per cent.
This latest move, which came on the heels of a quarter-percentage-point increase in March and a half-percentage-point jump last month, marked the Fed’s most aggressive rate hike since November 1994.
The US central bank is stepping up its rate-hike strategy as it races to tame inflation that has risen to a 40-year high. By sharply raising interest rates and making borrowing more costly, it hopes to cool demand in the economy by nudging consumers and businesses to curb spending.
Amid red-hot inflation, Fed officials have hinted at additional rate hikes to come.
“It is essential that we bring inflation down if we are to have a sustained period of strong labour market conditions that benefit all,” said Fed chair Jerome Powell, adding that “either a 50-basis-point or a 75-basis-point increase seems most likely” at the central bank’s next meeting.
But higher borrowing costs will also weigh on economic growth. Financial markets have been volatile in recent weeks over fears that the Fed’s rate hikes could tip the US economy into a slowdown or even a recession.
DBS chief economist Taimur Baig, who expects four more rate hikes from the Fed, said housing and investment – segments in the economy that are highly sensitive to interest rates – will weigh down on US growth through the course of next year.
“That could tip the US economy into a recession in the fourth quarter of 2023 or a tad later, which in turn could make 2024 the year of rate cuts,” he said.