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Fighting High Inflation: The US central bank significantly raises the key interest rate

Status: 04.05.2022 21:01

The US Federal Reserve reacted to high inflation and raised the benchmark interest rate by 0.5 percentage points. In the future it will be between 0.75 and 1%. It’s the biggest increase in 22 years.

As expected by analysts, the US Federal Reserve Bank (Fed) has raised interest rates. Due to the 0.5 percentage point increase, it is now between 0.75 and 1%. It is the first such large increase in 22 years. Usually, the Fed prefers to raise interest rates in 0.25 percentage point increments.

“Inflation is too high,” Central Bank Governor Jerome Powell told reporters. “We will act quickly to lower them again,” he promised. Increases of 0.5 percentage points should therefore return to growth in upcoming Central Bank Council meetings, he said.

A balancing act for the Fed

The central bank lowered the benchmark interest rate to zero at the start of the Corona crisis in March 2020 to support the economy. Over the course of the economic recovery, however, consumer prices increased significantly, by 8.5% year-on-year. This is the highest inflation rate since 1982. Disruptions in supply chains, significantly higher oil and energy prices, and labor shortages are driving inflation.

In March, the Fed raised interest rates for the first time since 2018, by 0.25%. Fed Chairman Powell said in late April that the goal was to use central bank tools in such a way that supply and demand would adjust again and inflation would fall. The economy is expected to cool in a way that does not correspond to a “recession”. The balance won’t be easy, he said.

The rise in the key interest rate makes credit more expensive and curbs demand. “There has never been such a rapid path in interest rates as the global economy weakened so quickly at the same time,” said Jochen Stanzl, an analyst at trading firm CMC Markets.

Additionally, Washington’s monetary authorities decided to gradually reduce the Fed’s balance sheet, which grew to nearly $ 9 trillion following massive bond purchases from June onwards. This takes liquidity away from the financial markets.

Coupled with interest rate hikes, the Fed wants to make loans more expensive and curb demand with this step. The announced reduction was largely expected by the financial markets.

The Fed is committed to achieving the goals of price stability and full employment.

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