Why is the Fed raising interest rates?  And how do these increases slow inflation?

Americans are still struggling with higher food, gas and rent costs.

While annual inflation slowed in August, it remained high at 8.3 percent, which was near a 40-year high.

While annual inflation slowed in August, remains high at 8.3%, which was close to a 40-year record.

At its last meeting in July, the Federal Reserve raised interest rates by 0.75 percentage points to widen the federal funds target range to 2.25% to 2.5% in an effort to rein in inflation. It also raised rates by 0.75 percentage points in June, which was then the largest single-session increase since 1994. A similar-sized hike is expected when the Federal Reserve meets again this week in light of a disappointing August consumer price index report and strong job growth pushing up wages.

But why are increases used to fight inflation and how do they work?

WASHINGTON, DC - JULY 27: US Federal Reserve Board Chairman Jerome Powell pauses during a news conference following a meeting of the Federal Open Market Committee (FOMC) at Federal Reserve Headquarters on July 27, 2022 in Washington, DC Colombia.  Powell announced that the Federal Reserve is raising interest rates by three-quarters of a percentage point.  (Photo by Drew Angerer/Getty Images) ORG XMIT: 775845047 ORIG FILE ID: 1242147034

WASHINGTON, DC – JULY 27: US Federal Reserve Board Chairman Jerome Powell pauses during a news conference following a meeting of the Federal Open Market Committee (FOMC) at Federal Reserve Headquarters on July 27, 2022 in Washington, DC Colombia. Powell announced that the Federal Reserve is raising interest rates by three-quarters of a percentage point. (Photo by Drew Angerer/Getty Images) ORG XMIT: 775845047 ORIG FILE ID: 1242147034

When will the Fed announce the next rate hike?

The Federal Reserve is expected to announce another hike by the end of its Federal Open Market Committee meeting on Tuesday, September 20 and Wednesday, September 21. FOMC is the body within the Fed that decides monetary policy, including interest rates. More committee meetings are scheduled for November and December.

How does a Fed hike work? How does it affect the prime rate, 10-year government bonds?

As the nation’s central bank, the Federal Reserve is responsible for monetary policy. His double the mandate is to promote “maximum employment and stable prices in the U.S. economy.” Stable prices mean keeping inflation under control, with a long-term average annual target of 2%.

In 2020, CPI inflation was 1.4%. In 2021, it was 7%.

One of the Fed’s primary tools for influencing inflation is the federal funds rate, which is the rate banks charge each other for overnight loans.

Although the Federal Reserve does not directly control all interest rates when it raises the federal funds rate, most other interest rates eventually follow suit, including adjustable-rate mortgages, credit cards, home equity lines of credit, and other loans. Some are tied to the prime rate, which is based on the federal funds rate, according to Bankrate.com.

The rising federal funds rate also affects 10-year Treasuries, which affects mortgages.

Borrowing money then becomes more expensive for consumers, who in turn spend less. Demand begins to decline and inflation, in theory, begins to recede.

Meanwhile, some Americans, especially seniors, are seeing their coffers bolstered by higher bank savings rates.

How many times has the Fed raised interest rates in 2022?

The Fed has raised interest rates four times this year. The shutdown of the economy due to the pandemic is holding down interest rates near zero before the Fed raised rates by 0.25 percentage points in March, the first hike in more than three years.

A further increase of 0.50 percentage points came in May, followed by a historic one A 0.75 percentage point increase in June and then another jump of 0.75 in July, putting the rate in the current range of 2.25% to 2.5%.

How much will the Fed raise rates?

Economists polled by Bloomberg forecast a third straight increase of 0.75 percentage points this week. That would bring that range from 3% to 3.25%. The same economists surveyed predicted that the upper end of the range would reach 4% by the end of the year.

Are rising interest rates good for stocks?

Rising interest rates create volatility in the stock market. The the value of future earnings tends to decrease when higher interest rates are expected, according to US Bank, making investors less eager to push stock prices higher.

Higher interest rates are meant to slow the economywhich can stop companies’ revenue, potentially harmful to their growth and stock prices, according to Forbes.

Contributed by: Paul Davidson, Medora Lee

This article originally appeared on USA TODAY: How can a Fed rate hike reduce inflation? Fed hikes explained.

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