The US Federal Reserve is likely to raise interest rates significantly again this year. The central bankers expect the key interest rate to rise to 1.9 percent by the end of the year, according to the Fed’s new forecasts on Wednesday. Last December, only a total of three interest rate hikes this year, each by 0.25 percentage points, were hinted at.
The US Federal Reserve increased its key interest rate on Wednesday for the first time since the beginning of the corona pandemic. The key interest rate for the world’s largest economy rose by 0.25 percentage points and is now in the range of 0.25 to 0.5 percent, the central bank announced on Wednesday. The central bank assumes that further hikes “will be appropriate”.
Effects of Ukraine war “very uncertain”
The Fed said the impact of the war in Ukraine on the US was “very uncertain”. In the short term, they should create upward pressure on inflation. At the same time, economic growth should be weighed down.
In the past few months, inflation in the United States has picked up sharply, and in February the inflation rate reached just under eight percent, its highest level in 40 years. As can be seen from the forecast published at the same time by the US Federal Reserve for further economic development, an inflation rate of 4.3 percent is expected at the end of 2022. That’s still double the Fed’s inflation target of 2 percent.
The about-face of the Fed’s monetary policy had been expected because of the very high inflation rate that had persisted for months. According to a new forecast by the central bank, several interest rate hikes are to be expected this year. In December, decision-makers at the Fed were still assuming on average that the key interest rate would rise to 0.9 percent over the course of the year – now they are assuming 1.9 percent this year and even 2.8 percent next year. The Fed balance sheet, which has been swollen as a result of the Corona emergency programs, is also to be reduced soon, which would deprive the financial market of liquidity.
Fed Chairman Jerome Powell told the US Congress earlier this month that the Fed’s goal is to enable a “long upswing” that will continue to ensure a strong labor market. “And that is only possible in an environment of price stability.” A high rate of inflation weakens the purchasing power of consumers because they can buy less for one euro or dollar than before.
One challenge for the US central bank is that it can only influence the causes of price increases to a limited extent. The disruptions in global supply chains and rising energy prices, for example, do not react directly to US interest rates. According to experts, the Russian war of aggression in Ukraine is likely to lead to new problems in the supply chains, as well as further corona lockdowns in China – as recently in the metropolis of Shenzhen.
The Fed is committed to the goals of price stability and full employment. The economy is now booming again and the job market is developing very positively. The unemployment rate had recently fallen to a low 3.8 percent. Many companies are already complaining about a shortage of workers.
In view of the good economic development and high inflation, the Fed had already initiated an important turnaround at the end of last year: Away from the considerable aid programs to fight the Corona crisis and towards a tighter monetary policy. Monthly asset purchases of up to $120 billion to provide liquidity to the financial markets and support the economy ended this month after being tapered. This was considered a prerequisite for the first rate hike.
Europe’s currency watchdogs are now also heading towards an end to their ultra-loose monetary policy. The European Central Bank (ECB) is scaling back its billion-euro bond purchases earlier than planned and has announced that they will end in the summer. It is still unclear when interest rates in the euro area will rise again after years of record lows.
On the foreign exchange market, the euro gave back its price gains after the monetary policy decisions. On Wall Street, the leading index, the Dow Jones Industrial, turned negative.
Source: Nachrichten
