Experts are warning that the recent decision by the Federal Reserve to raise interest rates to a 22-year high could push the United States into a “serious recession.” Sergio Rossi, a professor of macroeconomics and monetary economics at the University of Friborg in Switzerland, expressed his concerns about the potential negative impacts of the rate hike on the U.S. economy.
The Federal Reserve announced on July 26th that it would raise interest rates by 25 basis points, bringing the target range of the federal funds rate to between 5.25% and 5.5%. This marks the highest level in 22 years. Rossi believes that this decision, although not surprising given the U.S.’ failure to reach its 2 percent annual inflation target, will have detrimental effects on the economy, particularly due to the current high levels of debt and mounting non-performing loans at financial institutions.
Rossi argues that raising the federal funds rate to such a level will actually lead to an increase in inflation rather than its suppression. He explains that the higher interest rates will result in small and medium-sized enterprises raising the prices of goods and services. Additionally, the rise in interest rates will limit consumer loans, inhibiting economic growth.
The decision to increase interest rates will also cause the value of the dollar to rise in the foreign exchange market, negatively impacting US exports. Rossi states that this combination of factors will lead to a decrease in business investment, lower employment rates, and reduced wages for middle-class workers. This could ultimately result in a “vicious” cycle that pushes the United States into a severe recession that may spread to other inflation-stricken Western economies.
The potential consequences of this rate hike are causing concern among economists and market analysts. Many are wondering if the Federal Reserve’s decision could have far-reaching negative effects on the global economy. As the situation develops, experts and policymakers will be closely monitoring the impact of the rate hike on various sectors and industries.
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