As of: 06/15/2022 9:28 p.m
To combat the high inflation rate, the US Federal Reserve increased its key interest rate sharply by 0.75 percentage points. It is now in the range of 1.5 to 1.75 percent, as the Fed announced. It’s the biggest jump since 1994.
In the fight once morest high inflation, the US Federal Reserve has raised the key interest rate more than it has since 1994. It approved an increase of 0.75 percentage points to the new range of 1.5 to 1.75 percent. The Fed announced the third rate hike this year.
The monetary watchdogs signaled that they will make several further increases this year in order to keep inflation in check. They are targeting an average interest rate level of 3.4 percent for the end of the year. In March, they had envisaged a value of 1.9 percent. In the longer term, an interest rate level of 2.5 percent is targeted.
Inflation stays above target for longer
Monetary policymakers also raised their inflation forecast. Despite the planned interest rate hikes, the inflation rate is expected to average 5.2 percent in 2022, an increase of 0.9 percentage points compared to the previous forecast from March. In the next two years, the rate should then fall to 2.7 and 2.3 percent, respectively, and thus approach the Fed’s target value of 2.0 percent.
For the current year, the currency watchdogs are now only forecasting economic growth of 1.7 percent, following 2.8 percent previously. Fed Chair Jerome Powell reiterated the Fed’s “determination” to curb inflation. Inflation is also a heavy burden for US President Joe Biden. Given the displeasure of the voters in the midterm congressional elections in November, its Democrats must fear bitter defeats.
“Clear signal of stability”
“The interest rate hike by 75 basis points is a clear signal that the bank is now vigorously pursuing its stability goal following a long period of hesitation and will not repeat the policy mistakes of the 1970s,” commented economist Michael Heise of HQ Trust. A significant weakening of the economy is to be expected. However, a strong recession will be prevented by high order backlogs in industry and strong post-corona demand in the service sector.
Financial markets relatively relaxed
In the financial markets was given the recently surprisingly increased inflation rate to 8.6 percent a step of this unusual size had been expected in the USA. The markets reacted to the decision with appropriate composure. After an initial negative reaction, the leading American index, the Dow Jones, climbed back into positive territory.
The ECB is also raising interest rates
Due to high inflation, central banks worldwide are under pressure to tighten their loose monetary policy. After much hesitation, the European Central Bank (ECB) also recently decided to end the multi-billion dollar bond purchases on July 1st. “The decision was approved unanimously,” said ECB President Christine Lagarde.
At the next regular meeting of the ECB Council on July 21, the ECB intends to raise key interest rates once more for the first time in eleven years, initially by 0.25 percentage points each time. In September, Europe’s currency watchdogs are likely to step up their game – even more so than in July if inflation remains high. The prerequisite for this is that the in-house forecasts see the inflation rate in 2024 at 2.1 percent or higher.
