US Fed Creates History With Its Second Significant Rate Increase Since 1994; How Will This Impact Global Economy?

Thu, Jul 28, 2022 11:37 AM on Economy, National, International, Latest,

Following a larger-than-anticipated three-quarters percentage point hike in June, the Fed raised the policy rate twice in a row by 75 basis points (bps) on Wednesday. The Fed has raised interest rates four times in the last four months, the most since 1994.

The initiative to curb growing consumer costs comes as high inflation and rising energy prices cause trembling in the world's financial markets.

The Fed will probably need to increase interest rates several more times in the upcoming months due to the high rate of inflation. To slow inflation, Fed officials may even turn to more significant rate rises.

Every economic decision made by the US has an instant impact on the global markets because it has the largest economy in the world. Raising interest rates and strengthening currencies are related on a fundamental level. Moreover, the US dollar is frequently used as a yardstick for measuring both past and present economic growth. A strong dollar is considered advantageous in developed nations. In developing and emerging nations, however, the situation is different.

The aftermath of rising rates is already creating havoc in the global economy. Despite forecasts that economic growth will remain constant in the second quarter, the Bank of England has increased rates four times since December, reaching a 13-year high. In July, the European Central Bank is anticipated to hike interest rates for the first time in 11 years, by a quarter point. The situation is the same in the majority of countries that are dealing with inflation.

The Federal Reserve's interest rate increase of 75 basis points might cause volatility in the stock market, dampen investor elation, and further devalue the Indian rupee relative to the US dollar. Since Nepal's currency is pegged to India's, the decline in the value of the Nepali rupee is mostly due to the decline in the Indian rupee's value against the US dollar during the same period. In simple terms, it means that when the Indian currency is strong, the Nepali currency automatically strengthens and when it is weak, the opposite occurs.

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