The US Federal Reserve (Fed) is taking a break after ten interest rate hikes in a row. It is leaving its key interest rate in the range of 5.0 to 5.25 percent, as the Central Bank Council decided on Wednesday.
Since March 2022, the Fed has raised its key interest rate by a total of five percentage points in the fight against high consumer prices. The cycle is considered one of the fastest and sharpest tightening periods in Fed history. However, the central bank is already indicating that the pause will be followed by further interest rate hikes this year.
Consumer price inflation has moderated
The new inflation figures are likely to have given the Fed momentum not to raise interest rates now. According to the US government, the rise in consumer prices in the US weakened noticeably in May. They rose by 4.0 percent compared to the same month last year. This rate is the lowest since March 2021.
The inflation rate rose to a good nine percent last year. The US Federal Reserve has now published new inflation estimates. In the current year, it expects the inflation rate to be somewhat lower than previously assumed. The inflation rate is expected to average 3.2 percent. The medium-term inflation rate desired by the Fed is two percent.
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, there is a risk that the economy will stall. The Fed is now predicting slightly higher economic growth for this year than assumed just three months ago. The gross domestic product (GDP) of the world’s largest economy will grow by one percent in 2023. That would be 0.6 percentage points more than forecast in March.
Further rate hikes are likely to follow
Fed Chair Jerome Powell had already opened the door to a possible interest rate pause after the May meeting, but had not made a commitment. He made it clear at the time that interest rate cuts were not to be expected in the foreseeable future. The decision-makers at the Fed are now anticipating an average key interest rate of 5.6 percent by the end of the year – in March it was 5.1 percent. An average of 4.6 percent is expected for 2024. The Fed’s interest rate hikes are unlikely to have had their full effect yet, as they only take effect with a time lag.
And so the central bankers are likely to be cautious about the current inflation data from the government. Because the decline is mainly the result of falling energy and raw material prices. Core inflation, which is less volatile, has fallen only slowly so far. The strong US labor market is also problematic for the Fed. Because this can drive up inflation because low unemployment strengthens the negotiating position of employees in wage negotiations.