EDEN IAS

Federal Funds Rate

UPSC CURRENT AFFAIRS | FED HIKE & RECESSION WORRIES IN FEDERAL FUNDS RATE | 29TH JULY | INDIAN EXPRESS

SYLLABUS SECTION: GS III (ECONOMY)

WHY IN NEWS?

Recently, Federal Reserve raised the Federal Funds Rate (FFR) target by another 75 basis points in a bid to cool down inflation in the US at a four-decade high at 9.1% in June.

WHAT IS THE FFR?

  • It is the interest rate at which commercial banks in the US borrow from one another overnight
  • The US Fed can’t directly specify the FFR, but it tries to target the rate by controlling the money supply.
  • When the Fed wants to raise the prevailing interest rates in the economy, it reduces the money supply, thus forcing every lender in the economy to charge higher interest
  • The process starts with the commercial banks charging higher to lend to one another for overnight loans.

WHY IS THE FED TIGHTENING THE MONEY SUPPLY?

  • to rein in inflation in the economy
  • to dent the overall demand in the US economy
  • reduced demand for goods and services is expected to bring down inflation.
WHAT IS A RECESSION, AND IS THE US CURRENTLY FACING ONE?
  • The most common definition of recession requires the GDP of a country to contract in two successive quarters.
  • the GDP has contracted by 0.9% in second quarter of 2022 IN Federal Funds Rate.
  • the GDP had already contracted by 1.6% during the first quarter.
  • Contracting GDP typically results in job losses, reduced incomes, and reduced consumption.
NBER’S DEFINITION
  • In the US, it is the National Bureau of Economic Research (NBER), that typically declares a recession. And it defines recession a little differently.
  • The NBER’s traditional definition of a recession is that “it is a significant decline in economic activity that is spread across the economy and that lasts more than a few months”.
  • The committee’s view is that while each of the three criteria — depth, diffusion, and duration—needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another.
What is the outlook for the US economy?
  • The US economy is facing a situation of inflation at a four-decade high and, at the same time, unemployment rate at five decades low
  • The monetary tightening has already resulted in GDP contraction in two successive quarters. But the inflation rate is still much higher than the Fed’s target rate of 2%.

Read more: UPSC CURRENT AFFAIRS

SOURCE: INDIAN EXPRESS

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