The US Federal Reserve is likely to keep its key interest rate stable at a high level today. At 7:00 p.m. CET, the Fed plans to announce its decision on the further course of monetary policy. If the central bank does not change the interest rate again – as analysts expect – the key interest rate would remain in a range of 5.25 to 5.5 percent. This is the highest level in more than 20 years.
Commercial banks can borrow central bank money at this rate. It would be the fifth time in a row that the Fed has left the key interest rate unchanged at this level. At the same time, inflation in the USA is turning out to be stubborn.
At the last meeting at the end of January, Federal Reserve Chairman Jerome Powell made it clear that the current interest rate level had “probably reached its peak” and that interest rate cuts could be expected this year. At the same time, he dampened expectations that the Fed would cut interest rates at its meeting in March. They first want to wait and see how inflation develops.
Consumer prices have recently risen much more slowly than they did a year ago. However, new figures from the US government show that price inflation in the USA has unexpectedly accelerated somewhat again. Consumer prices rose by 3.2 percent in February compared to the same month last year. Analysts on average had expected an unchanged rate of 3.1 percent.
The US Federal Reserve is aiming for price stability of 2 percent in the medium term. Keeping inflation under control is the classic task of central banks. Since March 2022, the Fed has raised its key interest rate by more than five percentage points at a record-breaking pace in the fight against inflation – but recently stopped turning the interest rate screw and left interest rates at a high level. The rapid inflation was triggered, among other things, by the rise in energy prices after the Russian attack on Ukraine and the consequences of the corona pandemic. The inflation rate in the USA was always more than 9 percent in the summer of 2022, the highest it has been in around four decades.
The Fed will also release new forecasts. In December, Fed decision-makers expected an average key interest rate of 4.6 percent for this year. That suggested about three rate cuts in 2024. It will now be interesting to see whether the Fed will stick to this forecast – or, given the stubborn inflation, will now expect smaller interest rate cuts this year. Some analysts expect a first rate cut only at the meeting after next in June, others only at the meeting at the end of July.
It is important for the Fed to find the right balance. Because if interest rates are too high, there is a risk of a recession. As expected, the Fed’s rapid interest rate hikes had dampened growth in the largest economy. But the US economic data has positively surprised economists – and probably also central bankers. The good economic data is reducing the pressure on the Fed to quickly and significantly reduce interest rates. The New York Times calls the central bank’s approach a “so far unexpectedly painless process.” “It is becoming increasingly likely that (central bankers) will not cut interest rates at all this year,” the newspaper quoted analyst Joseph Davis of asset manager Vanguard as saying.