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Monetary Policy Spotlight: Fighting Inflation: US Federal Reserve Raises Interest Rates Again – Major Rate Hike | news

It’s the biggest rate hike in nearly 30 years: To combat the high rate of inflation, the US Federal Reserve is drastically raising its policy rate by 0.75 percentage points. It is now between 1.5 and 1.75 percent, as announced Wednesday by the Federal Reserve (Fed). It is the third increase in interest rates since the start of the coronavirus pandemic and the first increase of 0.75 percentage points since 1994. The Fed usually prefers to raise interest rates in 0.25 percentage point increments.

“We at the Fed are aware of the difficulties that high inflation entails,” Fed Chairman Jerome Powell said at a news conference. The 0.75 percentage point increase is “obviously unusual”. “I don’t think passes of this magnitude are common,” he said. But it is of “crucial importance” to fight inflation. That is why the decision was made to undertake this huge interest rate hike.

Based on the latest data on persistently high inflation, some analysts had already suspected in recent days that the Fed might surprise the markets with a 0.75 percentage point increase. In March, Fed policymakers still expected an average key interest rate of 1.9 percent at the end of the year. They now assume 3.4% this year and even 3.8% next year.

The Fed also expects significantly lower economic growth this year than assumed just three months ago. The gross domestic product (GDP) of the world’s largest economy is expected to grow by 1.7%. That would be 1.1 percentage points lower than the March forecast. The US Federal Reserve also expects a higher rate of inflation than previously assumed for the current year. Despite projected key interest rate hikes in 2022, the inflation rate is expected to reach an average of 5.2%.

The pressure on the central bank is currently great: the inflation rate is higher than it has been for about four decades, which is reducing the purchasing power of consumers; people can afford less for the same income. The Fed is now trying to raise interest rates to curb inflation. This makes the loans more expensive, which slows down the demand. This helps reduce the rate of inflation, but it also weakens economic growth.

Prior to Wednesday’s meeting, Fed policymakers had given a clear signal that another 0.5 percentage point hike was expected. However, last week’s data showed that consumer prices rose 8.6% in May compared to the same month last year. This was the highest since 1981. In addition, new surveys indicate that consumers expect prices to continue to rise in the future. Inflation data has increased the pressure on the Fed as it moves further and further away from the desired inflation rate of 2% over the medium term.

It’s a balancing act for the central bank: it wants to raise interest rates so much that it slows inflation, without simultaneously stopping the economy and the labor market and triggering a recession. “We are not trying to create a recession,” Powell said. “We recognize that our actions impact communities, families and businesses across the country,” he said. But the goal is to lower inflation. “It is clear that people don’t like inflation.” Many would experience inflation like the current one for the first time in their life.

Due to the Corona crisis, the Fed had lowered its key interest rate to near zero and the economy as well financial markets supported with extensive emergency programs. Last year, the Fed still mainly described the increase in the inflation rate as a “temporary” effect due to the pandemic. Towards the end of the year, however, he spearheaded a move away from his ultra-loose monetary policy a. In March, for the first time since the pandemic, it raised the benchmark interest rate by 0.25 percentage points. In May, given the high rate of inflation, an increase of 0.5 percentage points followed, which was the strongest increase in 22 years.

A challenge for the Fed is that it can only influence some of the causes of price increases to a limited extent. Disruptions in global supply chains and rising energy prices do not directly respond to US interest rates. The Fed is also unable to control the consequences of the war in Ukraine and the crown bloc in China.

However, the high rate of inflation is also causing concern in the White House: many voters blame the government of President Joe Biden for it. Put simply, the higher the prices, the lower Biden’s poll numbers drop. This is a problem for the President and his Democrats, who are trying to defend their slim majority in both houses of Parliament in the November Congressional elections.

WASHINGTON (dpa-AFX)

Image sources: tlegend / Shutterstock.com, Mesut Dogan / Shutterstock.com

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