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Interest Rate Decision: US Federal Reserve Raises Key Interest Rate Again – Fed Wants To Undo Bloated Balance Sheet | news

To combat high inflation, the US Federal Reserve significantly raised its benchmark interest rate by 0.5 percentage points. The interest rate is now between 0.75 and 1.0 percent, as announced Wednesday by the Federal Reserve in Washington. Analysts largely expected a tightening of this magnitude.

It was the second increase in interest rates since the start of the crown pandemic and the first 0.5 percentage point increase in 22 years. By May 2000, the interest rate had risen to 6.5 percent, shortly before the Internet bubble burst, the consequences of which led to a series of reductions in the benchmark rate from 2001 onwards. Typically, the Fed prefers to raise interest rates in 0.25 percentage point increments.

Furthermore, the Fed wants to merge its balance sheet, which has been inflated by the crisis measures. The central bank has announced a corresponding plan. As a result, a portion of the maturing securities owned by the Fed should no longer be invested in new bonds. The dismantling is expected to begin in June and gradually increase.

The Fed’s total assets are now nearly $ 9 trillion. This is about ten times the normal amount before the economic and financial crisis. Since then, the balance sheet has expanded step by step through crisis purchases of government bonds and mortgages.

The Fed’s original monetary policy was severely affected by asset purchases and changed character. Small open market transactions to control the key interest rate are practically no longer possible. A reduction in total assets equates to a tightening of monetary policy.

The consequences of the Russian war of aggression in Ukraine, for example in the energy and food markets, are increasing inflationary pressure and risk weighing on the economy, the Fed said. Crown lockdowns in China are also likely to cause new problems in global supply chains, which could affect inflation and growth. The Central Bank Board is therefore very focused on inflation risks, he said.

The Fed is currently under pressure as the inflation rate is at its highest level in decades. Consistently high inflation is eroding consumers’ purchasing power. In March, for example, prices increased by 8.5 percent compared to the same month last year.

Analysts therefore expect further rate hikes this year. According to observers, the key interest rate could be at or just above 2% by the end of the year. The Fed also wants to quickly reduce its balance sheet, which has grown to about $ 9 trillion as a result of the Corona emergency programs, from June onwards. This will withdraw additional liquidity from the markets and make credit more expensive.

Federal Reserve Chairman Jerome 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. “It will be a great challenge. We will do our best to make it happen,” promised Powell.

The rise in the key interest rate makes credit more expensive and curbs demand. This helps reduce the rate of inflation, but it also weakens economic growth. It is therefore a dangerous balancing act for the central bank: it wants to raise interest rates so much that it slows down inflation, without simultaneously stopping the economy and the labor market.

The Fed is committed to achieving the goals of price stability and full employment. The US economy is now booming again, with the unemployment rate recently dropping to a low of 3.6%.

The US central bank is not thinking about even stronger interest rate hikes

The US Federal Reserve reserves the right to further significant interest rate hikes in the fight against high inflation. At the moment, rate hikes even stronger than Wednesday’s by half a percentage point are not being considered.

“We are strongly committed to restoring price stability,” Fed Chairman Jerome Powell said following the Fed’s interest rate decision in Washington. Therefore, further 0.5 point hikes are entirely possible in upcoming interest rate meetings. Even clearer steps of 0.75 points, for example, are not currently under discussion.

The US dollar and yields came under considerable pressure following Powell’s comments. US stocks, on the other hand, rose dramatically. Before the last interest rate meeting, experts were evaluating that the Fed could fight high inflation with particularly significant interest rate hikes.

In view of the high rate of inflation, European currency holders are also about to change course in their monetary policy. The European Central Bank (ECB) has already decided to eliminate its multi-billion dollar bond purchases more quickly. Furthermore, several members of the Governing Council of the ECB no longer ruled out a first hike in interest rates in July. Financial markets expect the ECB to raise the deposit rate, at which banks can park money with it, from minus 0.5 percent to zero percent this year.

Financeen.net / dpa-AFX editorial staff

Image sources: spirit of america / Shutterstock.com

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