Frankfurt The US Federal Reserve (Fed) has once again made its determination in the fight against inflation, which recently stood at 8.3 percent, clear. It raised interest rates by 0.75 percentage points (75 basis points) on Wednesday to a range of 3.0 to 3.25 percent. The markets had expected this step, but had not ruled out an increase of a full percentage point.
Michael Heise, Chief Economist at HQ Trust, comments: “The Fed has hiked interest rates by 0.75 percentage points for the third straight month in the fastest rate-hike cycle since the late 1980s. Your policy is therefore no longer neutral, but should be seen as slowing the economy.”
The question of when exactly interest rates will have a dampening effect is, however, quite controversial among experts. Markets initially responded with rising yields and falling share prices, but the trend quickly reversed.
Fed Chair Jerome Powell stressed that the labor market was “extremely tight” and that it was “out of balance”. And he warned, “The longer inflation stays high, the greater the risk that it will take on a life of its own.” He also reiterated that the Fed will shrink its balance sheet, which tends to push up long-term bond yields.
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Powell made it clear once again that the fight against inflation has undisputed priority over possible dampeners for the economy. “Nobody knows if there’s going to be a recession, and if so, how bad it will be,” he said. But he did point out differences from previous rate hike cycles that could provide some relief.
The labor market could cool down a bit without significantly higher unemployment, he explained, because the first priority was to reduce the oversupply of vacancies. In addition, inflation expectations are well anchored and prices are being driven in part by supply constraints that should be overcome soon.
Inflation forecasts raised
Federal Reserve policymakers have also issued new forecasts known as “dots.” Measured against the mean value (median) of these forecasts, the key interest rate should now be 4.4 percent at the end of the year, 4.6 percent at the end of 2023 and then 3.9 percent in 2024.
This is a significant increase from the last projections in June of 3.4 percent (2022), 3.8 percent (2023) and 3.4 percent (2024). An estimated value for 2025 has now been added, which is 2.9 percent.
The estimates for inflation and unemployment have also increased somewhat compared to June, while the values for growth are lower. For the coming year, 1.2 percent growth, 4.4 percent unemployment and 2.8 percent of the so-called PCE inflation are now announced, which the Fed pays special attention to, but usually well below the usual figure of the consumer price index lies.
The consensus of expert forecasts for the Fed meeting had long been on a 50 basis point rate hike, but rose to 75 points after ominously high inflation numbers for August. Inflation fell slightly in August, but less than expected. Also, prices increased slightly month-on-month instead of declining as previously forecast.
The main reason for the year-on-year decline was falling gasoline prices, partly due to the US government’s release of oil reserves. All other areas and the so-called core inflation, which does not take into account energy and food, rose significantly.
>> Read here: The week of the big jumps in interest rates
Central banks around the world are taking action to combat inflation, and the Bank of England is expected to raise interest rates again on Thursday. Monetary policymakers face the dilemma that too weak a response could lead to inflation becoming entrenched, while too hard a stance could trigger a recession.
In the USA there is also the fact that economic momentum is difficult to assess. While the real estate market appears to be cooling, the labor market, which is driving consumer prices particularly strongly in the US, is likely to remain overheated.
Before the interest rate decision, Blerina Uruci, US economist at the fund company T. Rowe Price, summarized the situation as follows: “Inflation remains stubborn and the labor market is too hot. But growth is slowing and the real estate market is undergoing a significant correction.”
Fed Chairman Powell has faced criticism for the past year because he was initially hesitant to react to the rise in prices. It should be added that in the USA the inflation dynamics are much more clearly based on strong demand, which was also fueled by the government’s generous corona aid. In Europe, on the other hand, the sharp rise in energy prices has played the main role to this day.
Central banks can react much more easily to excessive demand than to a shortage of important goods such as gas.
>> Read here: “Interest rate hikes ECB are exaggerated”: Criticism of the jumbo rate hike is getting louder
Recently, a rather tough monetary policy course had also prevailed in other regions: The European Central Bank (ECB) dared to raise rates by 75 basis points, the Swedish Reichsbank even increased the key interest rate by 100 basis points this week.
More: “Incredible price hammer”: Producer prices in Germany are rising at record speed