US Fed Interest Rates: Interest rates increased again in America, reached 15 years high, GDP growth forecast decreased – federal reserve increased interest rates us stock markets rise
GDP growth estimated to be 0.5% in 2023
With this decision of Fed, the target rate has come in the range of 4.25 to 4.50. This is the highest level since 2007. Now the interest rate for the end of the year 2023 has been estimated at 5.1 percent. This exceeded the expectations of investors. Most authorities expect interest rates to be cut in 2024. Also, the unemployment rate is expected to increase to 4.6 percent by the end of 2023. It will remain in 2024 as well. At present, the unemployment rate in America is at 3.7 percent. GDP growth in the year 2023 is estimated to be 0.5 percent. This is lower than the estimate of 1.2 per cent made in September.
US market decline
After the decision of the Federal Reserve, there was a decline in the US stock markets. Dow Jones was trading down by 0.98 per cent, S&P-500 by 1.16 per cent and Nasdaq by 1.33 per cent on Wednesday night. On Thursday, a decline can also be seen in the Indian stock markets.
RBI increased the repo rate for the fifth time
Recently, RBI has increased the repo rate for the fifth time in a row. The repo rate was increased by 0.35 percent by the RBI. Due to this, the repo rate has now increased to 6.25 percent. The central bank had increased the repo rate by 0.40 per cent in the month of May. After this, the repo rate was increased by 0.50 per cent in June, August and September. In this way, from May 2022, the central bank has increased the key interest rates by 2.25 percent. After this latest hike, the repo rate or short term lending rate has crossed 6 per cent. This is the rate at which banks borrow from RBI. Now when the loan from RBI is getting costlier for the banks, they are also increasing the interest rates on the loans for the customers.
Why do central banks raise interest rates?
Central banks raise interest rates to control inflation. It is very important to create a balance between demand and supply in the economy. Inflation starts increasing when the demand is high and the supply is low. One of the reasons behind the increase in demand is the high liquidity. When people have more money, they will spend more and demand will increase. A good demand is good for GDP growth. But when inflation becomes high enough, central banks try to squeeze liquidity out of the market. Central banks increase key interest rates. After this, banks also have to increase the rates on loans. Due to increased interest rates, customers reduce taking loans. Due to this, the liquidity (inflow of money) in the market decreases and inflation is controlled.