U.S. Fed raises interest rate by 75 bps to tame inflation, the biggest rate increase since 1994

The Federal Reserve of the United States announced the most aggressive interest rate hike in nearly 30 years, raising the benchmark borrowing rate by 0.75 percentage points.

Basics: Rising interest rates will make U.S. bonds more appealing, causing investors/citizens to invest in them rather than spend. Borrowing will also become more expensive, which will keep inflation in check. In addition, FII from emerging markets may withdraw funds and invest in U.S. bonds. This will strengthen the U.S. dollar against other currencies.

The rate hike in the benchmark interest rates came amid record inflation in the U.S. since 1981 due to supply and demand imbalances, higher energy prices, etc.

But based on past experiences, the sudden rate tightening can trigger a recession. A recession or slowdown is a period of declining economic performance across an entire economy lasting for several months, usually two consecutive quarters of negative growth.

Indicators of Recession

1. Decline in real GDP; Decline in Real Income; Rise in Unemployment; Decline in Consumer spending, Stagnation of manufacturing and wholesale/retail sales.

2. Inverted yield curve, i.e., short-term debt instruments carrying higher yields than long-term instruments of the same credit risk profile, is an important event preceding the recession. Recently, the treasury yields of 2 and 10-year bonds inverted in the USA.