On Wednesday, Feb 16, the US Federal Reserve approved its first interest rate increase in more than three years, in a bid to address concerns of inflation stifling economic growth. The measure raised the interest rate by 0.25 percent to ease increasing inflation, which hit a new 40-year high of 7.9% in February.

Fed Raises Interest Rate

The announcement comes following the Federal Open Market Committee (FOMC) meeting where participants submitted their projections of the most likely outcomes for economic growth, the unemployment rate, and inflation for each year from 2022 to 2024 and over the longer run. Wednesday’s measure is the first of several interest rate increases anticipated in 2022, with both consumers and small businesses being affected.

Increasing interest rates is the federal reserve’s best tool to fight the record-high inflation, global supply chain disruptions, and spiraling gas prices eating into the budgets of Americans. Rising costs of food, products, and fuel have threatened to erode any wage gains that workers may have seen in the last year. By increasing the interest rate, the Federal Reserve plans to encourage savings, and with less cash circulating in the economy, inflation will ultimately go down.

“We are strongly committed to achieving the monetary policy goals that Congress has given us: maximum employment and price stability. Today, in support of these goals, the FOMC raised its policy interest rate by 1/4 percentage point”, said Jerome Powell, chairman of the Federal Reserve.

Possible Woes for Wallets

The increase in the interest rate has some concerns on whether it could negatively impact small businesses in the post covid era. Before COVID-19 the interest rate banks used to lend money to each other had been near zero. However, with the increased interest rates, stock prices could come down, and the cost to borrow money can start to go up.

Small businesses could also feel the pinch with more expensive loans, higher credit card costs, and slower business growth. An increase in interest rates would mean higher borrowing costs making it a challenge for businesses to buy inventory, buy new machinery and expand their businesses.

If not managed properly, it could discourage consumer and business spending. Higher interest rates would also mean credit card debts, home loans, and new mortgages will also get more expensive.

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