The Federal Reserve is formulating its plan to fight crippling inflation this week, and the uncertainty has the stock market going haywire. The board is meeting Tuesday and Wednesday to determine when to start hiking the central bank’s benchmark interest rate, which has been near-zero since the start of the pandemic. Many firms anticipate the Fed may hike rates four times or more in 2022, though so far the Fed has only forecast three increases. The Fed will announce its latest plan Wednesday afternoon.
The impact is widespread, from injecting volatility into the stock market to causing higher interest rates for all types of loans. But the Fed believes the move will help cool the 7% inflation the U.S. is experiencing today by removing so-called “easy money.”
While global economies experienced similar shocks at the onset of the pandemic, recovering from it looks different for major economies. When it comes to hiking central bank interest rates, the U.S. is largely going it alone. Here’s why.
China
The No. 2 economy just cut benchmark rates last week, loosening monetary policy in an effort to stave off an economic slowdown and revitalize real estate. On Tuesday, the International Monetary Fund downgraded its 2022 global growth forecast amid omicron for China and the U.S.
Japan
The No. 3 economy is living in negative interest-rate territory and has been for years.
Recently, the Bank of Japan’s governor said, “Raising rates is unthinkable.”
That’s because inflation in Japan has been below the 2% target for years, a far cry from what the U.S. is facing.
European Union
The European Union, with inflation at 5%, is experiencing conditions similar to the U.S. Still, the European Central Bank does not currently forecast any rate hikes in 2022, taking a gamble that its inflation rate will go down on its own when the supply chain smooths out.
Economists predict the U.S. will see inflation dip below 3% by the end of the year, much closer to the 2% inflation rate targeted by the Fed. Still, that cool down comes with moves by the Federal Reserve to reverse two years of pandemic policies.
