1. Fed increases the federal funds rate by 75 bips to 1.6 percent, this is the rate at which banks and credit unions lend overnight without collateral to other institutions.
Set to reach 4 percent by the end of the year.
2. T bills/bonds are the rate at which the US govt borrows to fund expenditure, this is at 3.45 percent.(10y)
Home Mortgage rates are now at 6 percent in the US, which shud lower demand for housing.
Similarly higher rates discourage Capex and borrowing, in theory this should slow down the economy and curtail inflation.
At 1.6 % while inflation has averaged 7 % for the first half of the year, inflation would need to fall to 3 % abruptly to get it to the short term 5 % tgt.
4. Problem?
Why will a fed rate of 1.6 % with inflation at 8 % contain inflation ?
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