The current data on inflation gives the Fed leeway on its key interest rate to wait for further developments. But the US Federal Reserve is not yet ready to declare victory in the fight against high consumer prices.
The US Federal Reserve (Fed) is keeping a further interest rate hike open this year in the fight against high consumer prices. This is what new forecasts published yesterday by the central bank of the world’s largest economy indicate. Interest rates next year could also be higher than previously expected.
At its current meeting, the Central Bank Council decided to keep the key interest rate in the range of 5.25 to 5.5 percent. It is the highest level in more than 20 years. However, Fed Chairman Jerome Powell did not want to rule out a further jump in interest rates. It has not yet been decided whether the current interest rate level is sufficient.
“We have seen progress”
At the press conference after the meeting, the Fed chief emphasized that the data for the coming months would determine the central bank’s approach. In its current forecast, the Fed expects an average key interest rate of 5.6 percent at the end of the year. An average of 5.1 percent is expected for 2024 – in June it was 4.6 percent. “We have seen progress and we welcome that,” said Powell, referring to inflation. But we now have to wait and see how the situation develops, he warned. According to the Washington Post, Diane Swonk, chief economist at auditing firm KPMG, said: “They don’t want to declare victory too early, even if they have made great progress.”
Keeping inflation under control is the classic task of central banks. The Fed aims for price stability in the medium term with an inflation rate of two percent. The Fed had raised the key interest rate eleven times since March 2022 in the fight against high inflation – most recently by 0.25 percentage points in July. The cycle is considered one of the fastest and sharpest tightening periods in the Fed’s history. Only in June did the monetary authorities take a break after ten hikes in a row. Analysts had expected another break in interest rates. “We have come a long way and the impact of our tightening has not yet been fully felt,” Powell said.
“Predictions are very difficult”
The inflation rate rose to a good nine percent last year – and then slowly fell. According to the US government, consumer prices rose by 3.7 percent in August compared to the same month last year. The Fed now expects an average inflation rate of 3.3 percent this year – a slight upward correction of 0.1 percentage points. The Fed is forecasting 2.5 percent for next year. This means that inflation is now steadily declining after the rapid increase. However, Powell warned: “Forecasts are very uncertain. Forecasts are very difficult.”
In the fight against high consumer prices, the Fed is increasing interest rates in order to slow down demand. If interest rates rise, private individuals and businesses have to spend more on loans – or borrow less money. Growth is slowing, companies cannot pass on higher prices indefinitely – and ideally the inflation rate is falling. At the same time, however, there is a risk of strangling the economy. Finding the right balance is the big challenge for central bankers.
However, the Fed’s new economic forecast paints a fairly positive picture of the US economy. The Fed is predicting significantly higher economic growth this year than expected three months ago. The gross domestic product (GDP) of the world’s largest economy will therefore grow by 2.1 percent in 2023. That would be 1.1 percentage points more than forecast in June. Next year, however, the economy is expected to grow a little more slowly again – the central bankers are predicting growth of 1.5 percent.
Source: Stern
