The US Federal Reserve has increased its key interest rate by 0.25 percentage points to combat inflation, thus continuing its more moderate course. The key interest rate is now in the range of 4.5 to 4.75 percent, as announced by the Federal Reserve (Fed).
It is the eighth increase in a row and the smallest step since last March. 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.
Inflation has slowed down recently
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.
unemployment rate fell
The strong US labor market is likely to continue to be a problem for Fed Chairman Powell. Unemployment fell surprisingly at the end of last year and had reached its lowest level in almost three years. In December, the unemployment rate fell to 3.5 percent.
While that’s good news in itself, a labor shortage in key industries can fuel inflation. There is a risk of a wage-price spiral. However, wages have recently risen less than expected.
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. In December, the ECB decided to hike interest rates by 0.50 percentage points to 2.50 percent. At the time, ECB President Christine Lagarde promised further increases of this magnitude “for some time”.
