The Fed began raising interest rates a good year ago and has since raised the key interest rate several times by an impressive 0.75 percentage points. The Fed had thus set a pace that it had not seen in decades. Most recently, however, the central bank has already been taking smaller interest rate hikes: In March, it only raised the most important interest rate by 0.25 percentage points.
US inflation remains stubborn
When making its decision, the Fed had to weigh up the balance between calming concerns in the banking sector and fighting high inflation. Because the turbulence at some US regional banks is at least partly due to the aggressive rate hikes by the Fed. However, the high consumer prices in the USA are proving to be persistent. In March, consumer prices rose by 5.0 percent compared to the same month last year. It was the lowest increase since May 2021. But both that reading and the full-year forecast are still a long way from the Fed’s target inflation rate of 2 percent on average.
Keeping inflation in check is the traditional task of central banks. If interest rates rise, private individuals and the economy have to spend more money on loans – or borrow less money. Growth is slowing, companies cannot simply pass on higher prices – and ideally the inflation rate is falling. In the USA, however, the labor market is still robust. What actually sounds good can drive up consumer prices even further. Because a strong labor market is generally seen as a driver for wages and thus for inflation. So the big question now is whether Fed Chair Jerome Powell will actually hold out the prospect of a rate pause for the coming meetings.
“The worst case scenario for (the Fed) would be to signal that it’s done and then be forced by the data to do a U-turn,” the New York Times quoted Blerina Uruci of the US fund company T. RowePrice. It seems clear that the Fed has no plans to cut interest rates, at least for the foreseeable future. Instead, it is likely to keep high interest rates steady for a few months and only then slowly start lowering them.
Editorial office finanzen.net / dpa-AFX
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