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Tuesday, February 7, 2023

Stimulus Checks Become Vital As Feds Hint Higher Unemployment With Increase In Interest Rates

The American economy continues to be under attack on all fronts as the high inflation makes life miserable for the common people, especially the low and moderate earners. The end of federal stimulus checks has made matters worse even as prices touch record levels, the highest in over 40 years.

The stock market too has tanked in recent weeks, the worst first half for US stocks since 1970. Concerns continue to mount over how the measures taken to curb inflation will affect economic growth.

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The benchmark S&P index has fallen 20.6% while other leading US indexes also faced a sharp slide. It was no better on the other side of the Atlantic as stocks in Europe and the UK fell sharply while Asia did not have it any better.

Stock Prices Drop As Federal Banks Try To Rein In Inflation With Higher Rates

The slide in stock prices comes even as nations around the world try to rein in spiraling living costs, with prices of gasoline and essential items soaring to record levels.

Economists fear that the American economy, the world’s biggest, is set to go into a deep recession by the end of this year as interest could be jacked up to halt the inflation rate. Economists say that if the Federal Reserve continues to hike interest rates the stock market will react negatively.

Stimulus Check
Stimulus Check
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Shares are likely to continue to experience short-term volatility as central banks around the world continue to combat high inflation. Moreover, the war in Europe continues to rage, and the fear of recession remains high.

Along with the S&P 500, the Dow Jones Industrial Average too fell 15% in the first two quarters of 2022. It is the biggest drop since 1962. The Nasdaq Composite, which focused more on tech stock also saw a sharp downward slide and loss of around 30%, marking the biggest drop in percentage for the first two quarters of 2022.

Housing Correction On The Cards As Inflation And Lack Of Stimulus Checks Negates The Boom Seen In 2021

A strong housing correction is on the cards in the US. But it is expected to fall short of a total crash. As the Federal Reserve introduces the biggest increase in interest rates in years to combat mounting inflation, housing prices are likely to fall as it is inflated at present.

Cities such as Tuscon, Phoenix, northeast Florida, the two Carolinas, and Boise are all set for correction as they are among the most overvalued markets in America.

But this drop in the housing sector is not going to bring much relief immediately to renters, experts caution. As interest rates remain rising and the supply of starter homes for buyers remains limited, potential buyers will be constrained by a limited choice to move from lease to loan.

The construction of housing for multi-families and rising permits will relieve the pressures to some extent. This will cause the growth of rent to cool down somewhat at this stage.

But despite the broad spread expected in the adjustment of the price, a crash seems unlikely at this state for several reasons.

Housing vacancy rates are already at an industry low. Vacancy rates touched a historic high before the financial crisis in 2008-9.

The quality of mortgage underwriting is also quite high. Most loans are for long periods of between 15 and 30 years and have a fixed rate of interest, the so-called “low-vanilla” loans. The nationwide signs of flipping and speculation are also low.

Rising Unemployment Could Become A Reality As Feds Provide No Guarantee With rising Interest Rates

The US Federal Reserve is set to take steps that are sure to end the job market recovery as it struggles to tame the inflation rate, which has led to demands for more stimulus checks for the low and moderate-income population.

The central bank raised interest rates by three-quarters of a percentage point. That took it up to 1.6%, which is the highest since 1994. This will certainly lead to a rise in unemployment for as many as 6 years.

Jerome Powell, the Federal Reserve Chairman, said that the labor market remains extremely tight and the inflation rate too.

Federal Reserve officials expected inflation to flatten and show a decline by this point. Consumer prices have risen at an annual 8.6%, the highest annual increase since 1981.

Stimulus Check
Stimulus Check

At this point, the Federal Reserve is aiming to bring down the rate of inflation by hiking the rate to 75 basis points. The Fed is aiming to bring down the inflation rate killing consumer demand. But raising the interest rates will not affect any of the issues that are affecting prices such as supply chain snags and the European war. 

The Federal Reserve chair said that there are issues that they cannot affect and that is the price of commodities that are rising around the world including the war and its fallout.

Bringing Down Inflation Vital For Federal Administration In Absence Of Federal Stimulus Checks

Stimulus checks offered a powerful economic lifeline to millions of people over the last couple of years. This was especially true in 2021 when in the 2nd year of the pandemic when the federal administration sent out over half a dozen stimulus checks. The funds went out to tens of millions of families and individuals and spared many families from poverty.

But the stimulus checks also fuelled inflation, and it has now touched the highest in over 4 decades. Figures released by the Fed suggest that inflation and the stimulus checks are linked as the latter contributed to the rise of the former. Research points out that the stimulus check may have added at least 3 percentage points to the inflation plaguing the US economy.

Since the first half of last year, inflation increasingly moved ahead of the inflation rate in other countries, especially the developed ones. The Biden administration realizes that despite the positive effects third stimulus check, the record inflation could have a big negative impact on the purchasing power and could pose a real danger for the ruling Democrats in the midterm elections this fall.

Now states have moved in to help out residents through various forms of stimulus checks including direct transfers, paper checks, gas and transit cards, tax waivers for gasoline and essential items, and tax rebates.

Maine and New Mexico have already begun sending stimulus checks to their residents and around 10 more states are set to begin soon, including California and Hawaii.

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