The US Federal Reserve has raised interest rates to their highest level in 22 years in a bid to fight inflation. After a further increase of 0.25 percentage points, it is now in the range of 5.25 to 5.5 percent. Fed Chairman Jerome Powell expressly left the door open for further hikes.
Today the European Central Bank (ECB) initiated another rate hike in the euro area – by 0.25 percentage points.
ECB President Christine Lagarde had already announced a further increase for the meeting. After years of zero and negative interest rates, the ECB has raised interest rates eight times in an unprecedented series since July 2022 in the face of persistently high inflation. The key interest rate at which commercial banks can get fresh money from the ECB is now 4.0 percent.
Inflation in June well above ECB target
In the medium term, the ECB is aiming for price stability in the euro area with an inflation rate of two percent. Despite a slowdown, inflation remained well above the ECB’s target in June. Consumer prices rose by 5.5 percent in June compared to the same month last year, after 6.1 percent in May. The rapid inflation was triggered, among other things, by the rise in energy prices after the Russian attack on Ukraine.
In the US, the eleventh increase in 16 months was widely expected. The exciting question was how to proceed. In June, the Fed took a pause after ten hikes in a row. At the time, it signaled at least two more rate hikes this year. However, since then, a further drop in inflation has been announced.
Powell: Inflation should be on target of two percent
The Fed has not made any decisions about future rate hikes, stressed Fed Chairman Powell. At the same time, he was open to further increases. After the decision, he pointed out that inflation was still above the target of two percent. And the central bank is determined to bring them to this level. It is not expected to reach the two percent until “2025 or something like that,” said Powell. But that doesn’t mean that the Fed will raise interest rates until the mark is reached: “That’s how you overshoot the mark.”
Powell also pointed out that there will be more economic data before the next interest rate decision. Based on this, the Fed could decide to raise interest rates further or leave them at the current level. So far it has been possible to curb inflation without damaging the labor market.
Steady rate hikes since spring 2022
Keeping inflation in check is the traditional task of central banks. If interest rates rise, private individuals and the economy 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. At the same time, however, there is a risk of stalling the economy. Finding the right balance is the big challenge for central bankers.
In the fight against the high rise in consumer prices, the Fed had steadily raised the key interest rate since March 2022, sometimes in increments of 0.75 percentage points. The cycle is considered one of the fastest and sharpest tightening periods in Fed history.
According to media reports, there are different views among the members of the US Federal Reserve Board about the further course. Some are in favor of going ahead with rate hikes. The other faction wants to stop the hikes to protect the job market, the financial service Bloomberg wrote.
June data showed that high inflation in the US had eased again and noticeably. Consumer prices rose by 3.0 percent compared to the same month last year. That was the lowest level in a little over two years. In the previous month, the rate was 4.0 percent. Core inflation, which excludes volatile energy and food prices, fell to 4.8 percent from 5.3 percent in June.
