The US Federal Reserve wants to fight inflation with rising interest rates while ensuring that the country does not slide into a recession.
(Photo: dpa)
Dusseldorf The latest inflation data from the USA had been awaited with great excitement because inflation has become the biggest problem on the financial markets and in politics. In April, consumer prices in the world’s largest currency area rose by 8.3 percent compared to the same month last year.
This was announced by the Department of Labor in Washington on Wednesday. This means that inflation in the USA has weakened for the first time since August 2021, but remains at a high level. Inflation was 8.5 percent in March.
US President Joe Biden already went on the defensive on Tuesday. “Families across the country are suffering” from rising prices, he admitted. “They are frustrated and I can understand that. We have a lot to do.”
On Tuesday, fuel prices rose to a fresh all-time high. A gallon (about four liters) of gasoline cost an average of $4.37 and diesel cost $5.55.
Top jobs of the day
Find the best jobs now and
be notified by email.
For Americans, inflation is the number one campaign issue for the November midterm elections. The Democrats have long feared that they could lose their narrow majorities in the House of Representatives and the Senate.
Biden assured that his administration is looking for ways to compensate for the price pressure. Among other things, the lifting of certain punitive tariffs introduced by his predecessor Donald Trump would be discussed. A temporary lifting of the gasoline tax is also an option.
Nervousness in the energy markets
What is clear, however, is that Americans will continue to suffer from high prices and their consequences for quite some time. Because even if prices rise less sharply, a return to the levels of a year ago is a long way off. The energy markets could remain tense for quite some time due to the war in Ukraine. According to economists, rents will not fall again anytime soon.
Biden expressed his confidence in the US Federal Reserve (Fed) on Tuesday. But Fed Chair Powell himself concedes that fighting inflation with rising interest rates while ensuring the country doesn’t slide into recession will be difficult. Market experts like Mohamed El-Erian, who advises Allianz among other things, consider it extremely unlikely that this will succeed.
Stockbrokers are unsettled
The stock markets have been extremely unsettled since the most recent Fed meeting in early May. Fed Chairman Powell signaled two further interest rate hikes of 0.5 percentage points, but initially ruled out a rate hike of 0.75 percentage points. This fueled concerns that the Fed might not be doing enough to fight inflation.
But the central bank currently has no good options. With prices rising faster than wages, “American living standards are being eroded,” warns Diane Swonk, chief economist at US consultancy Grant Thornton. She assumes that the unemployment rate, which was just 3.6 percent recently, will have to rise to cool the economy.
This in turn would hit the lower income brackets particularly hard, who had already suffered severe losses during the pandemic. Swonk reckons the Fed will need to raise interest rates to at least 3.5 percent to get inflation under control again. Other economists believe that a key interest rate of five percent is necessary.
More: ECB boss Lagarde prepares markets for rate hike in July.