The US Federal Reserve is following suit: On Wednesday, it will probably raise interest rates sharply again in view of the rapidly rising prices. But then she could take her foot off the pedal.
The US Federal Reserve is not letting up in the fight against inflation and is about to take the fourth major rate hike in a row. The financial markets are firmly assuming that the key interest rate will rise again by a whopping 0.75 percentage points on Wednesday – and the upper limit will then be 4 percent.
The background: With an inflation rate of 8.2 percent recently, the central bankers around Fed Chairman Jerome Powell are under a lot of pressure. But given the signs of an economic slowdown, investors are increasingly betting that the world’s most influential central bank will take things a little slower at the end of the year after the jumbo interest rate hike. As a result, investors and journalists will once again pay particular attention to what Powell says and doesn’t say at the interest rate outlook press conference.
There are already bets on the futures markets that December will only go up another half a point. Meanwhile, speculation is mounting that the Fed will cut rates in the second half of 2023. Although higher interest rates have a price-dampening effect, they also slow down the economy.
“The US Federal Reserve is trying by all means to squeeze the spirit of inflation back into the bottle,” says KfW chief economist Fritzi Köhler-Geib. The rapid increase in the key interest rate to the range of 3.00 to 3.25 percent is noticeable in the real estate sector, for example, which has cooled down significantly.
Business with new single-family homes collapsed in September. An average interest rate of 7.16 percent is required for a building loan with a 30-year term – this is the highest value since 2001. Since the beginning of the year, the interest costs for mortgage holders have more than doubled. The reason for this is the central bank’s sharp interest rate hikes, which are making loans more expensive for consumers and companies.
“It will probably take until the spring of next year for the increased financing costs to fully affect the real economy,” explained Köhler-Geib. The time will then come for the Fed to slow the pace of rate hikes.”
Fed Vice Chair Lael Brainard recently stated that the US economy is slowing faster than expected. However, the full impact of the rate hikes will only become clear months later. Despite high inflation and rising interest rates, the American economy was still growing in the summer. US gross domestic product increased by an annualized 2.6 percent in the third quarter. In view of the global economic downturn and the consequences of the tighter interest rate policy, however, things are unlikely to continue at this pace.
Some economists and investors are even anticipating a recession in the US. “The interest rate shock is not only a major problem for the real estate industry. Corporate investments will also come under pressure with a slightly longer delay,” predicts economist Andreas Busch from Bantleon AG, a Swiss asset manager. The labor market, which was still robust until recently, will then also be drawn into this downward spiral, which will ultimately slow down private consumption. The US is headed for a recession that is likely to last well into next year.
At the same time, inflation could already have peaked, as Merck Finck’s chief strategist, Robert Greil, suspects: “Since inflation in the USA, unlike in Europe, has probably already peaked despite all the stubborn components, the Fed could ‘ “Wording’ on future monetary tightening is slightly toned down. However, if it doesn’t, it would disappoint markets.”
