At the U.S. Federal Reserve – who elected them that they wield such power? – they met yesterday to decide whether to raise the interest rate for the 10th time in a row. The Central bankers decided to lift the rates to a range of 5% to 5.25%.
The last time interest rates rose above the 5% mark was in 2007, just before the global financial crisis.
That does not mean that the same will happen now. But at the moment, dark clouds are threatening the economy.
Let’s take things from the beginning:
After years of imposing historically low, even negative, interest rates, inflation rose rapidly. The Fed – the central bank – having delayed taking action, i.e. gradually raising the interest rate, began to raise it rapidly.
This was bound to be a strong jolt to consumers and the banking system.
As far as consumers are concerned, the increase in interest rates leads them to reduce demand for real estate, first of all. It also leads, sooner or later, to a reduction in the demand for labor, which, although still extremely strong, is now showing signs of a downturn.
On the other hand, the rapid rise in interest rates is creating a serious disturbance in the banking sector.
Already three major banks – Silicon Valley, Signature Bank, and First Republic Bank – have collapsed since the beginning of March, forcing the authorities to intervene, first to prevent them from failing and then to sell them off.
Indeed, it was in this tragic situation that the Greek-American star of the banking sector, Jamie Dimon, Chairman and CEO of JPMorgan Chase, bought First Republic Bank.
Also, the FDIC – the government agency that guarantees deposits up to $250,000 – increased the amount of bank account guarantees to prevent a chaotic situation in the banking sector and the economy.
Of course, for years they have been debating whether giant banks – because they were ‘too big to fail’ – should not be allowed to be created because if they did fail, they would drag down the entire economy.
But this does not seem to worry the authorities at the moment.
They have now patched up the situation. Let’s see how long this lasts.