As expected, the Federal Reserve (Fed), the system of American central banks, raises the main interest rate in the United States by 50 basis points in one fell swoop. The Fed announced this on Wednesday after its monthly interest rate meeting. Such a sharp increase was ago from 2000.
The new rate hike – 25 basis points was added in March, good for the first rate hike since 2018 – should help combat sky-high inflation. In March, it was no less than 8.5 percent on an annual basis, the strongest increase in consumer prices in forty years. Raising interest rates would make borrowing more expensive and demand would fall. But at the same time, higher interest rates also threaten to slow economic growth and possibly even lead to a recession.
The US economy contracted unexpectedly in the first quarter, but Fed chief Jerome Powell said there is no immediate threat of a recession, he said on Wednesday in a commentary on the Fed’s rate decision.
The main interest rate is now set at 0.75 to 1 percent. More rate hikes will follow in the coming months, Powell confirmed. “Inflation is way too high. We act quickly to bring them down,” he said. “The committee is in pretty general agreement that additional increases of 50 basis points should be on the table in the next few meetings.”
But a 75 basis point jump, which some analysts had already assumed, seemed to be rejected by the Fed chief. That is not actively being considered, it sounded. Such a step is ago from 1994
bonds
Another measure to curb inflation is to reduce the balance sheet full of purchased bonds. That basically means less money flowing into the economy. During the corona crisis, the Fed just bought tens of billions of dollars of bonds to pump money into the economy. The bond portfolio thus swelled to about $9,000 billion. From June, the phase-out will start at a pace of $47.5 billion a month, accelerating after three months to $95 billion.
In a statement, the Fed says it is “very attentive to inflation risks”. Reference is made not only to the war between Russia and Ukraine, but also to new lockdowns due to corona in major Chinese cities, including the metropolis of Shanghai. These are “expected to exacerbate supply chain disruption,” which could push prices up further.
Other western central banks, such as those of the United Kingdom, Norway and Australia, have already raised interest rates. The European Central Bank (ECB), responsible for the eurozone, is still hesitating. Vice President Luis de Guindos recently said that the historically low interest rates for the euro countries could go up in July, but that this is far from a certainty.
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