The US Federal Reserve can report initial successes in the fight against high consumer prices. But she continues to turn the interest rate screw.
Due to persistently high inflation, the US Federal Reserve has increased its key interest rate by 0.25 percentage points, thus continuing its more moderate course. At the same time, Fed Chair Jerome Powell announced further rate hikes. It is too early to announce “victory” in the fight against high consumer prices. “We think there’s still a lot to do.”
The eighth increase in a row means the smallest step since March. The key interest rate is now in the range of 4.5 to 4.75 percent. The European Central Bank (ECB) is also expected to raise interest rates this Thursday.
Rate cuts are not on the agenda at the moment
In the past few months, the Fed had acted particularly aggressively against the high rate of inflation and had raised interest rates at a rapid pace – the result of inflation that was at times higher than it had been in decades. It raised the key interest rate several times by an impressive 0.75 points – but slowed the pace by 0.5 points at the end of last year. Powell made it clear that rate cuts are not currently an option for him. “I just don’t see that we’re going to cut interest rates this year.”
Recent data shows that high inflation is on the wane in the world’s largest economy. The rate of inflation in the USA had recently fallen further – a sign of the first successes of the strict monetary policy. In December, consumer prices rose by 6.5 percent compared to the same month last year. In November it was still 7.1 percent. It was the sixth decline in the inflation rate in a row – but it is still high.
Powell made it clear, “We will stay the course until the task is done.” In December, the Fed predicted it would hike rates to just over 5 percent this year. The International Monetary Fund (IMF) also recently emphasized that the central banks should not let up despite initial successes. The battle is not yet won.
unemployment rate fell
The strong US labor market is likely to remain a problem for the Fed. At the end of last year, unemployment reached its lowest level in almost three years: 3.5 percent. While that’s good news in itself, a labor shortage in key industries can fuel inflation. There is a risk of a wage-price spiral. However, wages have recently risen less than expected.
Keeping inflation in check is a classic task for central banks. In the medium term, the Fed is aiming for an average inflation rate of around 2 percent. If interest rates rise, private individuals and the economy have to spend more money on loans – or borrow less money. Growth is slowing, companies cannot simply pass on higher prices, and ideally inflation is falling.
With such a tight monetary policy, however, the risk also increases that the central bank slows down the economy so much that it stalls. However, the US economy had grown surprisingly strongly at the end of last year, which has reduced concerns about a possible recession. Powell also emphasized that he expects growth this year – albeit at a low level.
The ECB is also about to raise interest rates again. In December, she decided to jump 0.5 percentage points to 2.5 percent. At the time, President Christine Lagarde promised further increases of this magnitude “for some time”.
Source: Stern
