The US Federal Reserve is determined to bring inflation back down to the target of two percent. She’s a long way from that so far. It intends to remain on course with another sharp interest rate hike.
The US Federal Reserve is driving up the base rate in the fight against high inflation with another giant step. She followed up with the third raise of three-quarters of a percentage point. The key interest rate will thus rise to the new range of 3.00 to 3.25 percent. This new jumbo step had been expected on the financial markets.
Because the inflation problem in the USA is proving to be more stubborn than expected with a recent price increase rate of 8.3 percent. In their interest rate outlook, the currency watchdogs also signaled that they would step up their efforts and intend to raise the price of money to an average level of 4.4 percent by the end of the year. At the end of next year, the key interest rate should then reach 4.6 percent, which took the peak out of market speculation about possible reductions in the second half of 2023.
In March, the Fed said goodbye to years of zero interest rate policy in order to bring inflation under control with a series of interest rate hikes. Recently, the price pressure has eased further, but not as significantly as hoped. The Fed is aiming for annual inflation of 2 percent as the ideal value for the economy in the long term and is still a long way from that despite the recent decline.
The economy is weakening. After a decline in economic output at the beginning of the year, gross domestic product (GDP) also shrank in the second quarter. Projected for the year, the minus was 0.6 percent, but not as strong as reported in a first estimate.
The situation is also so complicated for the Fed because inflation is also being fueled by factors over which it has no control: Russia’s aggressive war in Ukraine is making energy more expensive. The tough lockdowns in China are repeatedly disrupting global supply chains, causing bottlenecks and thus leading to higher prices.
Fed Chair Jerome Powell has described key interest rates of 3.0 to 3.5 percent as a “moderately restrictive level”, with the economy already slowing down slightly. According to Fed Director Chris Waller, however, it will not stay that way: the key interest rate must rise to a level that significantly curbs the demand for goods in the economy. The Fed is ready to take decisive action to bring inflation back to the 2% target.
