In the fight against high inflation, the US Federal Reserve is about to raise the key interest rate for the seventh time this year. The Federal Reserve’s (Fed) decision on the future course of monetary policy will be announced today. A key interest rate increase of 0.5 percentage points to a range of 4.25 to 4.5 percent is expected. This would mean that the Fed would take a somewhat more moderate course than in the past few months. The new inflation data from the Department of Labor should encourage Fed Chair Jerome Powell.
In November, the rate of inflation in the USA weakened more than expected. Compared to the same month last year, consumer prices rose by 7.1 percent. Analysts had expected an average inflation rate of 7.3 percent, after 7.7 percent in the previous month. It is the fifth consecutive drop in inflation. The medium-term inflation rate desired by the Fed is two percent – and the new figures are still a long way from that. But they promise at least some relaxation. The Fed is committed to the goals of price stability and full employment.
Strict monetary policy is slowing down the economy
Inflation was still more than 9 percent in the summer. That is why the Fed had increased interest rates at a rapid pace in the past few months – most recently in November for the fourth time in a row by 0.75 percentage points. Usually, the Fed prefers to raise interest rates in increments of 0.25 percentage points. The increase in the key interest rate makes loans more expensive, which slows down demand. This helps bring inflation down, but it also weakens economic growth. Powell had recently announced a more cautious approach and thus smaller interest rate hikes.
With the Fed’s strict monetary policy, there is a growing risk that the central bank will slow down the economy so severely that the job market and economy will stall. “There is always a risk of a recession. The economy remains vulnerable to shocks,” said US Treasury Secretary Janet Yellen in a recent TV interview. But the US has a healthy banking system and a healthy corporate and household sector. She was optimistic about the coming year. “I think inflation will be lower. I’m very confident that the job market will remain quite healthy.”
The job market in the US is booming. This is definitely problematic for the Fed. Many employers complain that they cannot find enough applicants. This has an impact on wages, because the negotiating position of employees is strengthened by the comparatively low level of unemployment. This represents an additional risk of inflation – a wage-price spiral could threaten.
