The Fed has fought high consumer prices by raising interest rates – and can show success. But the inflation rate is still too high. Interest rate cuts seem to be a long way off.
The US Federal Reserve (Fed) is leaving the key interest rate unchanged at a high level for the sixth time in a row in view of stubbornly high inflation. It remains in the range of 5.25 to 5.5 percent, as the Central Bank Council announced on Wednesday in Washington. Commercial banks can borrow central bank money at this rate. This means that the key interest rate remains at its highest level in more than 20 years. The central bank of the world’s largest economy has raised its key interest rate by more than five percentage points at a record pace since March 2022 in the fight against inflation. Recently, however, she stopped turning the interest rate screw. However, price increases in the USA have recently unexpectedly accelerated again.
The high inflation in the USA is proving to be persistent. The inflation rate rose more strongly than expected in March. According to the Labor Department, consumer prices rose 3.5 percent compared to the same month last year. Analysts on average had expected a rate of 3.4 percent. In February it was still at 3.2 percent. However, economists assume that the inflation rate could fall in the coming months. The Fed aims for an inflation rate of 2 percent. The Fed has now stated that there has been no further progress towards this target in recent months.
Since March 2022, the Fed has raised its key interest rate by more than five percentage points at a record pace in an effort to combat inflation – the last interest rate increase was last summer. Since then, the Fed has kept interest rates at high levels. The inflation rate has now fallen significantly and prices are now rising much more slowly. In the summer of 2022, the rate was more than 9 percent, the highest it has been in around four decades. Nevertheless, the 2 percent target currently seems out of reach.
Good economic data
For the Fed, the fight against high consumer prices is a balancing act. It is turning the interest rate screw to slow down demand. If interest rates rise, private individuals and businesses have to spend more on loans – or they borrow less money. Growth is slowing, companies cannot pass on higher prices indefinitely – and ideally the inflation rate is falling. If interest rates are too high, there is a risk of a recession. However, the US economy is surprisingly strong despite high interest rates. The good economic data is not exactly putting pressure on the Fed to raise interest rates quickly. At the same time, the Fed announced on Wednesday that it would reduce its bond holdings more slowly.
The US Federal Reserve had actually forecast three interest rate cuts of 0.25 percentage points each for this year. In an estimate published in March, the Fed assumed a key interest rate of 4.6 percent on average for 2024. After the current meeting, the central bankers did not publish a new forecast on Wednesday. This will only come after the next Fed meeting in June. Given the stubbornly high inflation, it is now unclear whether there will actually be three interest rate cuts this year. Analysts assume that a rate cut is not expected until September at the earliest. Some of them also suspect that there could be just one rate cut this year.
US President Joe Biden is also likely to closely follow the Fed’s actions in the election year. Surveys show that voters are dissatisfied with his economic policies. The main reason for this is the high consumer prices. But the persistently high interest rates are also a problem for the Democrat. This makes mortgages, credit card debts and student loans more expensive for people in the country. In the presidential election in November, the Democrat will most likely face a duel with Republican former President Donald Trump.
Source: Stern
