With interest rates being raised by an additional 75 basis points this past week, it’s clear that the issue of inflation is continuing to frustrate The Fed and is affecting their policies. 

The new Federal Funds rate, which is the interest rate for banks that loan out money and is the basis for what all other interest rates are set at, had been raised from 2.25% to 2.50%, to now from 3% to 3.25%. This data is especially telling considering the fact that the target rate for the Fed is 2%. 

This will have a trickling effect through the rest of the sectors of the economy as lending institutions and investors grapple with the rising cost of money. 

The Fed is attempting to lower the level of investment in the economy by making money more expensive to borrow. If interest rates are high, investors will be less willing to take loans out for projects. This, the Fed hopes, will slow down the economy and combat inflation.

The policy of raising the Federal Funds Rate continues to be one of the more aggressive monetary policies, dictated by the central bank, that the Fed has taken in order to tamp down the rampant inflation, which does not seem to be decreasing in the United States. The last Consumer Price Index (CPI) measure was 8.3% for the month of August

The Fed, and Wall Street investors, expected that number to be lower and when the report broke their hopes, the market reacted aggressively with stocks tumbling

In most cases, people will not invest their money into ventures if they feel they cannot receive a positive return on their investment. Under the current economic climate, people are pulling their money from the market, which is evident through the tumultuous ride of the market. 

In addition, when considering the global economy, the European Central Bank recently raised their rate from 0.00% to 0.75% – a new high. This shows that the US is not the only country gripping with the pains of inflation, but it is in fact a phenomenon seen across the global markets. 

Europe, however, is put in an even more difficult position because of their direct relationship with the war in Ukraine, which affects multiple sectors. 

The next inflation report for the US will be released in October. It will be telling to see if the policies of the Fed were effective in bringing down the levels of inflation or if new policies have to be implemented. 

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