Economy shrinks, Fed raises rates

Interest rates increase graphic

The Commerce Department reported Thursday that the U.S. economy shrank by 0.9 percent—the second drop in as many months.

The drop adds to fears of a recession—economists at Bank of America foresee a mild recession later this year, and Goldman Sachs analysts estimate that there’s a 50-50 chance of a recession in the next two years. But Fed Chair Jerome Powell said Wednesday the economy is slowing, which will also curb inflation, and he doesn’t think the U.S. is in a recession.

The Commerce Department’s report is often revised as well. Inflation has been at a 41-year high so the Federal Reserve voted unanimously to raise interest rates by 0.75 of a percentage point Wednesday, putting it at 2.5 percent. Raising rates increases loan costs for consumers and businesses and is supposed to slow the economy and inflation.

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What will the Fed do next? The Fed has raised interest rates twice in the past two months. But its members said interest rates are now at a level that will neither stimulate nor restrain growth, so, they’ll be taking a less aggressive approach. They plan to raise rates to 3.5 percent this year, but at a slower rate.

Seemingly in response to the slower rate hikes, S&P 500 stock market index jumped 2.6 percent, and the tech-heavy Nasdaq Composite index rose 4.1 percent Wednesday, its biggest gain in more than two years. 

This story originally appeared in WORLD. © 2022, reprinted with permission. All rights reserved.

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