For several reasons, most notably maintaining the stability of the economy by controlling inflation

Why does the Federal Reserve raise interest rates?

The Federal Reserve raises or lowers the interest rate on the dollar based on what it sees as economic indicators.

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The US Federal Reserve raised interest rates by 75 basis points at its meeting held last week, raising the interest rate to 3%.

This is the fifth time in a row that it has raised interest rates during 2022, and the third time in a row that it has raised it by 75 basis points.

The Federal Reserve raised the interest rate by 75 basis points last July, and the same in the previous June, in the largest increase since 1994, in addition to raising it by 50 basis points in May, which is the largest increase in 22 years, and an increase of 25 basis points in March of the same year, in light of his efforts to control high inflation rates.

Given the impact interest rates have on economic life, some question why the Federal Reserve took these steps, and how raising interest rates could curb high inflation.

According to the newspaper "Washington Post", the Federal Reserve plays a huge role in maintaining the stability of the economy by controlling inflation, which has risen to levels that the Federal Reserve has to face as one of its biggest challenges in decades.

The council can raise or lower the interest rate on the dollar based on what it sees as economic indicators, as interest rates affect the amount that banks can lend to companies and individuals, and therefore low interest rates boost the economy by making investment in new projects or hiring employees or Getting a loan to buy expensive items like homes or cars is cheaper, so higher rates work the opposite and can slow down the economy by curbing consumer demand.

As for inflation, it occurs as a result of the mismatch of supply and demand in the economy, as during the Corona pandemic, people wanted to buy goods that factories could not keep up with, and families moved to look for new homes, but there was not enough of them, so goods such as cars and homes became more Expensive, with a decrease in the available supply of it in the market in light of the high demand.

At the same time, the Fed can't fix the supply side of the equation or do anything to boost the auto industry or build more homes, so it slows demand, which will inevitably lower prices, and an interest rate increase raises the costs of all kinds of money. Lending, including mortgage and auto loans.

But the more important question is why the Fed is raising interest rates so much?

In order to answer it, it is necessary to know that the inflation rate is very high. In August, prices were 8.3% higher than the previous year, which is much higher than what the Federal Reserve seeks, which is 2%.

Despite the increase in the rate of inflation for more than a year, the Federal Reserve has been late to intervene.

During 2021, officials insisted that inflation was a temporary feature of the recovery from the spread of the Corona virus, and would not become a constant part of daily life.

But over time, Fed leaders realized they were wrong, and rushed to raise interest rates in March.

Despite raising interest rates, the rate of inflation has continued to rise.

The Federal Reserve has had to ramp up its response even as the economy risks slowing to recession.

The increase in interest rates for mortgages means controlling the housing market, which witnessed levels of excessive rise and housing prices escalation, during the pandemic period, but during the past few months, the increase in interest rates led to a significant increase in the interest rate of mortgage loans, which for the first time reached 6%, This leads to a significant slowdown in the housing market and lower prices.

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