The US Federal Reserve is raising interest rates again to fight inflation. It raised the key interest rate again by 0.25 percentage points on Wednesday. It is now in the range of 5.25 to 5.5 percent, as the Federal Reserve announced. It is the highest level in 22 years.

The eleventh increase in 16 months was widely expected. The exciting question now is 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 hikes this year. However, since then, a further drop in inflation has been announced.

Powell: Inflation should be on target of two percent

Fed Chair Jerome Powell kept the door open for further rate hikes. In a press conference after the decision, he pointed out that inflation would remain above the Fed’s target of two percent. And the central bank is determined to bring them to this level. No decisions have been made on future rate hikes – but will consider further tightening of monetary policy if necessary.

At the same time, he pointed out that new data on economic development will come 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.

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.

Steady rate hikes since spring 2022

In the fight against the high rise in consumer prices, the Fed has steadily raised the base 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. The rapid inflation was triggered, among other things, by the rise in energy prices after the Russian attack on Ukraine.

According to the Fed, the decision on Wednesday was unanimous. However, 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 – but the Fed’s target is 2 percent. 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.