The US Federal Reserve raised interest rates to their highest level in 22 years to get inflation under control. The economy is still booming. How does the Fed decide today?
The US Federal Reserve will announce its decision on the further course of monetary policy today. Analysts expect the central bank of the world’s largest economy to leave key interest rates unchanged for the second time in a row.
This would keep it in a range of 5.25 to 5.5 percent – and thus at its highest level in 22 years. The Federal Reserve (Fed) raised interest rates eleven times in 16 months. She then took a break in September – just as she had done in June. It would be the first time since the beginning of last year that the Fed would leave the key interest rate unchanged in two decisions in a row.
When making its decision, the Federal Reserve weighs up the risk of inflation and the risk of the economy slowing too much. Higher interest rates slow price increases – but also consumer spending, which is the mainstay of the US economy. Because this makes it more expensive, among other things, to buy houses or cars on credit.
Inflation is cooling down
Since March 2022, the Fed has raised its key interest rate by more than five percentage points in the fight against the high rise in consumer prices. The rapid inflation was triggered, among other things, by the rise in energy prices after the Russian attack on Ukraine.
The latest economic data showed that inflation remains higher than the Fed’s target, but is cooling – and economic growth is at the same time high. Despite the high interest rates, gross domestic product rose by 4.9 percent in the summer compared to the previous quarter. That was the strongest growth in the world’s largest economy in seven quarters. Economists had on average only expected growth of 4.5 percent.
The boom in the US economy carries the risk that inflation could pick up speed again. The question for the future now is whether the Fed might consider further interest rate hikes necessary later on. On the other hand, defaults in servicing loans have recently increased again and in surveys more consumers spoke of tightening finances. This could indicate that consumer spending may be cooling even without further interest rate hikes.