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Tuesday, December 6, 2022

Economy: Another significant rate hike expected by the US Federal Reserve

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Jane
Jane
Jane Stock is a technology author, who has written for 24 Hours World. She writes about the latest in technology news and trends, and is always on the lookout for new and innovative ways to improve his audience’s experience.
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High inflation in the US is persistent. For months, the Fed has been trying to counteract them with unusually large rate hikes. So far, there has been no resounding success.

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In the fight against the high inflation rate, the US Federal Reserve is facing another sharp increase in the key interest rate. The Federal Reserve’s (Fed) decision on the future course of monetary policy will be announced today.

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Another rate hike of 0.75 percentage points to a range of 3.75 to 4.00 percent is expected. It would be the fourth straight hike of 0.75 percentage points and the sixth hike this year. Usually, the Fed prefers to raise interest rates in increments of 0.25 percentage points.

Values ​​above market expectations

The pressure on the central bank is great: US inflation is still high. According to data from October, the inflation rate is declining only slightly. Compared to the same month last year, consumer prices rose by 8.2 percent in September. Core inflation, which excludes fluctuating energy and food prices, even rose from 6.3 to 6.6 percent. Both values ​​were above market expectations and are forcing the central bank to act. Keeping inflation in check is the traditional task of central banks.

With a view to the important US midterm elections on November 8th, the high consumer prices are also an enormous burden for US President Joe Biden and his Democrats. In the elections, the Democrats could lose their already narrow majority in the US Congress. Surveys show that the subject of inflation is of particular concern to people in the country. According to the surveys, many voters see the Republicans ahead when it comes to economic competence. During the election campaign, they denounce the high inflation for which they blame the Democrats, while it is also a consequence of the Russian war of aggression.

Concerns about recession in the US

At the same time, the strict monetary policy increases the risk that the central bank will soon slow down the economy so much that the job market and the economy will be stalled. Because if interest rates rise, citizens and businesses have to spend more money on loans – or they borrow less money. As a result, growth slows down, companies can no longer simply pass on higher prices and, ideally, inflation falls. However, some fear that the Fed is overdoing it – and steering the world’s largest economy into a recession.

The US Federal Reserve has always used the solid labor market as an argument against the economy sliding into a deep recession. Many companies complain about a shortage of workers. The US economy also grew somewhat more strongly than expected in the summer. US President Biden saw this as proof of the ongoing economic recovery in the USA and the resilience of the people in the country. The US economy shrank in the first half of the year.

Will interest rate policy remain aggressive?

It is now the penultimate Fed meeting of the year – another meeting is scheduled for December. Some observers are also not ruling out the possibility that the Fed will only hike rates by half a point this time. Such a step would probably mean a departure from the Fed’s aggressive interest rate policy. However, experts consider this to be rather unlikely – just like an increase in the key interest rate by a full percentage point.

“The Fed’s top priority should be to curb rising prices. As long as there is no compelling evidence of a trend reversal, the Fed should remain firm,” writes the Washington Post. “A recession would not be desirable. But high inflation is a bigger threat, and it’s already here.” Should real wages fall further due to rising consumer prices, it would hit low-income people the hardest. The newspaper warns that the economy must not fall into the inflationary spiral of the 1970s.

Source: Stern

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