In the fight against high consumer prices, the US Federal Reserve increased its key interest rate by 0.75 points for the fourth time in a row – but indicates smaller steps in the future. The key interest rate is now in the range between 3.75 and 4.00 percent, the Federal Reserve announced on Wednesday.
“We continue to believe that continued hikes will be appropriate,” said Fed Chair Jerome Powell. However, he made it clear: “It will be appropriate to slow the pace of increases.” This could already be the case at the upcoming meeting in December.
Fed chair: increase at historically high pace
Powell defended the Fed’s monetary policy and called it appropriate – but spoke of a historically high pace with regard to interest rate hikes. “I’m glad we moved so quickly and I don’t think we caught up too much.” Normally, the central bank prefers to raise interest rates in increments of 0.25 points.
It was the sixth rate hike this year. The pressure on the central bank is great because the inflation rate remains stubbornly at a comparatively high level. Keeping inflation in check is the classic task of central banks. In the medium term, the Fed is aiming for an average inflation rate of around 2 percent. “We have an imbalance between supply and demand,” Powell said. It is premature to think about pausing rate hikes.
Inflation concerns many people in the US
Looking ahead to the November 8 congressional election, consumer prices are also a drag on President Joe Biden and his Democrats. In the elections, the Democrats could lose their already narrow majority in Congress. Surveys show that people are particularly concerned about inflation. Accordingly, many voters see the Republicans ahead in terms of economic competence. During the campaign, they denounce inflation for which they blame the Democrats, while it is also a consequence of the Russian war against Ukraine.
At the same time, the tighter monetary policy increases the risk that the central bank will slow down the economy so much that the labor market and economy will be stalled. Because if interest rates rise, private individuals and the economy 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. However, some fear that the Fed is overdoing it – and steering the world’s largest economy into a recession.
The central bank has always cited the solid labor market as an argument against the economy slipping into a deep recession. Many companies complain about a shortage of workers. The economy also grew somewhat more strongly than expected in the summer. Biden took this as evidence of economic recovery and people’s resilience. The economy had shrunk in the first half of the year.
Powell said he doesn’t see a wage-price spiral. “I don’t think that wages are the main cause of price increases.” However, he emphasized that as soon as such a spiral could be identified, one was in trouble. With a view to criticism of monetary policy, the Fed chief emphasized: “Price stability in the United States is good for the global economy in the long term.”
