Economy: Fed continues to tighten interest rate screw – ECB before new increase

Economy: Fed continues to tighten interest rate screw – ECB before new increase

Inflation in the US and the euro area is too high. As a result, the Fed chairman cannot bring himself to hold out the prospect of an interest rate pause. Instead, the Fed is keeping its options open.

After a moderate rate hike by the US Federal Reserve, the European Central Bank (ECB) is also heading for a further hike at its meeting today. Most economists expect the key interest rates in the euro zone to be raised by 0.25 percentage points. But another increase of 0.50 points is not off the table either.

The Federal Reserve raised interest rates yesterday by 0.25 percentage points to combat high consumer prices – it was the tenth straight hike. The central bank of the world’s largest economy did not want to commit itself to an interest rate pause at the coming meetings.

“Our monetary policy depends on the coming developments,” said Fed Chair Jerome Powell. He made it clear: “We stand ready to do more if monetary tightening should be called for.” He became clearer when asked whether interest rate cuts were possible in the foreseeable future. That’s not currently an option, Powell said.

“This could now have been the last rate hike in the current cycle,” wrote Friedrich Heinemann, an economist at the Center for European Economic Research. Like the ECB, the Fed is confronted with persistently high core inflation. However, the Fed is currently being helped, among other things, by the banking crisis.

The extent to which this will affect the economy is difficult to predict

After the collapse of two US money houses in March, the First Republic Bank also collapsed a few days ago. This recent turmoil in the banking sector could have a similar effect as interest rate hikes and dampen demand due to more cautious lending. Fed Chairman Powell is also banking on this. “Similarly, if banks raise their lending standards, it can lead to a tightening of credit,” he said. However, it is impossible to predict exactly to what extent this will affect the economy.

Keeping inflation in check is the traditional task of central banks. 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 the inflation rate is falling.

At the same time, there is a risk that the economy will stall. The high level of inflation in the USA had recently weakened more than expected. In March, consumer prices rose by 5.0 percent compared to the same month last year. However, this is still a long way from the target inflation rate of 2 percent on average.

Inflation in the euro zone picked up again somewhat in April. According to a first estimate by the statistics office Eurostat, consumer prices in the currency area of ​​the 20 states were 7.0 percent above the level of the same month last year. In March, the annual inflation rate fell significantly from 8.5 percent to 6.9 percent. Since July of last year, the ECB has raised interest rates in the euro area six times in a row. The key interest rate in the currency area is now 3.5 percent. In the USA, the key interest rate is in a corridor of 5.0 to 5.25 percent after the most recent interest rate hike.

Source: Stern

Leave a Reply

Your email address will not be published. Required fields are marked *

Latest Posts