Image: KEVIN DIETSCH (GETTY IMAGES NORTH AMERICA)
The key interest rate is now in the range of 4.5 to 4.75 percent, as the Federal Reserve (Fed) announced on Wednesday. It is the eighth increase in a row and the smallest step since last March.
US inflation on the wane
Most recently, the Fed had raised the key interest rate by an impressive 0.75 percentage points several times – but slowed down the pace at the end of last year with an interest rate step of 0.5 percentage points. Recent data shows that high inflation is on the wane in the world’s largest economy.
The Fed had acted particularly aggressively against the high rate of inflation in the past few months and had increased interest rates at a rapid pace. The drastic measures are the result of inflation, which at times was higher than it had been in decades. The rate of inflation in the USA had recently fallen further – a sign of the first successes of the strict monetary policy. In December, consumer prices rose by 6.5 percent compared to the same month last year. In November, the rate was 7.1 percent. It was the sixth decline in the inflation rate in a row – but it is still high.
Fed Chair Jerome Powell had already made it clear in December: “We will stay the course until the job is done.” In December, the Fed predicted it would hike rates to just over 5 percent this year. In its most recent economic forecast, the International Monetary Fund (IMF) also stressed that the central banks should not let up despite initial successes in their fight against high consumer prices. The battle is not yet won.
Keeping inflation in check is the traditional task of central banks. In the medium term, the Fed is aiming for an average inflation rate of around 2 percent. If interest rates rise, private individuals and businesses have to spend more money on loans – or they borrow less money. Growth is slowing, companies cannot simply pass on higher prices, and ideally inflation is falling. With such a tight monetary policy, however, the risk also increases that the central bank slows down the economy so much that it stalls. However, the US economy had grown surprisingly strongly at the end of last year, which has reduced concerns about a possible recession.
The European Central Bank (ECB) is also about to raise interest rates again. The Governing Council of the ECB is expected to raise the key interest rate in the euro area again at its meeting this Thursday.
Source: Nachrichten
