Image: JIM WATSON (AFP)
The Central Bank Council announced this on Wednesday in Washington. Commercial banks can borrow central bank money at this rate. The decision was expected. The key interest rate remains higher than it has been in more than two decades.
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The Fed’s new economic forecast also continues to suggest that the central bank may cut interest rates this year – but probably more slowly. The Fed’s decision-makers continue to expect an average key interest rate of 4.6 percent this year. That suggests three rate cuts this year. Since March 2022, the Fed has raised its key interest rate by more than five percentage points at a record-breaking pace in the fight against inflation – but has not turned the interest rate screw in the past few months and has left interest rates at a high level. Price increases in the USA had unexpectedly accelerated somewhat recently – inflation is proving to be stubborn.
Consumer prices rose by 3.2 percent
Consumer prices rose by 3.2 percent in February compared to the same month last year. Analysts on average had expected an unchanged rate of 3.1 percent. The US Federal Reserve is aiming for price stability of 2 percent in the medium term. The rapid inflation was triggered, among other things, by the rise in energy prices after the Russian attack on Ukraine and the consequences of the corona pandemic. The inflation rate in the USA was always more than 9 percent in the summer of 2022, the highest it has been in around four decades.
The US Federal Reserve has now published new estimates of the inflation rate. She expects an average inflation rate of 2.4 percent this year. This corresponds to the forecast from December. The Fed expects an inflation rate of 2.2 percent for 2025. Core inflation, i.e. without taking food and energy prices into account, is expected to be 2.6 percent this year (December: 2.4). The central bankers pay particular attention to this value in their analysis. According to experts, it reflects the general price trend better than the overall rate because components that are susceptible to fluctuation are excluded.
Keep inflation in check
Keeping inflation under control is the classic task of central banks. 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. But it is important for the Fed to find the right balance. Because if interest rates are too high, there is a risk of a recession.
As expected, the Fed’s rapid interest rate hikes had dampened growth in the largest economy. But the US economic data has positively surprised economists – and probably also central bankers. The Fed is now 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 2024 (December: 1.4). The new figures are likely to reduce the pressure on the Fed to cut interest rates significantly quickly, i.e. at the next meeting in early May.
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