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Post: There will be no old life. The United States faces an unexpected challenge.


MOSCOW, March 26 – RIA Novosti, Nadezhda Sarapina. The US Federal Reserve has raised the key interest rate to a record five percent and is not ignoring a decrease in assets on its balance sheet. The US Federal Reserve hopes this will lower inflation and reduce unemployment. How the new fiscal policy will affect ordinary citizens – in the material of RIA Novosti.

Fighting inflation

The key ratio determines the minimum cost of debt obligations, so with its growth, loans always become more expensive. This will affect both the functioning of banks and the lives of ordinary people. Cheap loans are the backbone of the US economy. Trying to reduce inflation to the targeted level, the Fed is doing serious damage to the established financial system.

The American banking industry is already going through tough times, and the decision poses a threat of recession. Experts believe that after Silicon Valley Bank and Signature Bank, most bondholders whose value has fallen are at risk of going bankrupt. For example, Lawrence McDonald, former vice president of finance firm Lehman Brothers, expects a wave of layoffs alongside a sharp decline in economic activity and GDP in the coming months.

Electronic scoreboard with dollar signs - RIA Novosti, 1920, 03/12/2023

Changes are coming. Which currency loses dollars

In mid-March, Moody’s rating agency gave a negative outlook on the US banking system. Analysts point out that a sharp move towards higher rates and tightening monetary policy will greatly complicate the activities of financial institutions, while rising deposit costs will reduce profits.

Economist Leonid Khazanov states that both the industry and the consumer sector will suffer. “It will be more difficult for businesses to borrow money and the public to buy goods on credit. This could lead to a decline in purchasing activity in the United States and could cause the entire American economy to stagnate.” The expert explains.

unreachable dream

More and more Americans cannot afford tuition, their own housing, or even rent. Oppression Guard It reports that since 2019, the number of homeless in California’s capital, Sacramento (500,000), has increased by 70% and is approaching ten thousand people. The crisis is gaining momentum across the country. Mayor portland Ted Wheeler talked about eight hundred trespassers. The city commissioner reported that there are fewer and fewer students in public schools, with people leaving with their entire families due to the sharp increase in crime. And according to the data new york postThe number of illegal campsites in Washington DC has risen to 120 over the past two years.

Campground in Washington DC.  February 2023 - RIA Novosti, 1920, 24.03.2023
Campground in Washington DC. February 2023

At the same time, real estate prices rose: the average cost of a home in Sacramento exceeded $500,000. The monthly rent will cost almost three thousand. That’s too expensive for most middle-class families. Local authorities are trying to find a compromise between helping the homeless and protecting citizens.

“A particularly dangerous trend is the rise in the number of homeless people over 65: Due to high rents and inflation, many retirees are unable to pay their rent and at the same time buy essential medicines and products. This is clear evidence of the lack of homeless people. There is an effective social policy and policy in the United States. protection of the poor” , – says Khazanov.

The new policy will make the problem worse. Mortgages become unaffordable. Even with a key rate of 4.75%, the cost of real estate loans reached a maximum in 20 years – 6.92%.

US President Joe Biden in his speech at the White House - RIA Novosti, 1920, 29.01.2023

On the verge of failure: Democrats and Republicans struggle threaten US with default

Everything is going according to plan

However, President Joe Biden says that nothing threatens the country’s banking system and that the measures taken will actually eliminate the risk of crisis. He counts on the professionalism of Fed Chairman Jerome Powell, who hopes to lower the cost of essentials by increasing the key rate.

It is noteworthy that this view is not supported by both business analysts and politicians. Louisiana Senator John F. Kennedy believes the decision will hurt millions of people and leave many out of work.

Alexander Razuvaev, a member of the Supervisory Board of the Association of Financial Analysts and Risk Managers, sees the Fed leadership as theorists unable to critically assess the situation. “They only care about inflation and act by the general rules, but it’s almost impossible to beat it with a rate hike,” he explains.

First Republic Bank in New York - RIA Novosti, 1920, 24.03.2023
First Republic Bank in New York

“Given the accumulated problems of the US financial system, it will not be possible to achieve an inflation of two percent in neither the short term nor the long term. On the contrary, it may accelerate due to higher energy prices,” Khazanov said. And then cleaning up the Fed’s balance sheet isn’t going to help.

Economists explain that raising the key interest rate, as designed by the Fed, will strengthen the dollar, which will lead to lower oil prices. But the plan may not work. OPEC countries reacted extremely negatively to the prospect of a ceiling on energy prices and the US attempt to bless it with appropriate legislation. Saudi Arabia, for example, has said it is ready to cut production and cut supplies entirely to countries accepting the restrictions. The price of oil will rise worldwide, and inflation in the US will ease even more.

Source: Ria

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