Before COVID outbreak in 2019, mortgage rates were 3.94% and many economist thought that this is the lowest level where federal bank could go. But 2020-21 proved them wrong.
Due to global pandemic, governments all over the world had to increase their expenditure and even ordinary people needed money to satisfy their needs.
Now, if government wanted to tackle this situation, they will have to print more money and lower lending rates so people can use excess line of credit. This is basic economics. Therefore, central banks all over the world reduced their lending rates and tried to fight and then revive from this disaster.
Similarly, federal bank which is USA’s central bank reduced their lending rate to 3% in 2020 and 2.65% in 2021.
Now, when the situation starts to recover (Post Pandemic) inflation rises as more money is pumped in the economy. The most basic thing to understand inflation is if you check your monthly grocery bill before pandemic and post pandemic you will see almost 8-10% increase. This is inflation.
Now, As prices increases, there is fear of hyper-inflation so federal bank raises interest rates. Due to this, liquidity is sucked from the market. And it eventually helps to stabilize the economy.
This same policy is followed all over the world.
Now, Why does Federal Bank or Governments do these things ?
The simplest answer is ” ECONOMY’s BEST STAGE IS WHEN IT IS STABILIZE ” Stabilize means not inflationary or deflationary stage. the reason behind this is altogether a different topic for discussion.
Further, when Economy is stabilize, Federal Bank will again start reducing the Lending interest rates at very slow speed. (Not like it did at the time of COVID).
NEWS 