The Fed had acted particularly aggressively against the high rate of inflation in recent months and had increased interest rates at a rapid pace – several times by a remarkable 0.75 percentage points.
Central bankers raised interest rates from nearly 0 percent to more than 4.25 percent last year. The drastic measures are the result of inflation, which at times was higher than it had been in decades. In December, the Fed adopted a somewhat more moderate course and raised the key interest rate by 0.5 percentage points. Usually, the Fed prefers to raise interest rates in increments of 0.25 percentage points.
The inflation rate in the USA had recently fallen further – an indication of the first successes of the strict monetary policy. In December, consumer prices rose by 6.5 percent compared to the same month last year. In November, the rate was 7.1 percent. It was the sixth decline in the inflation rate in a row – but it is still high. Core inflation – excluding volatile energy and food prices – fell to 5.7 percent from 6 percent. The developments were expected.
Nevertheless, there is currently no discussion about lowering interest rates again in the foreseeable future. Fed Chairman Powell had already made it clear in December: “We will stay the course until the job is done.” In December, the Fed predicted it would hike rates to just over 5 percent this year. In its most recent economic forecast, the International Monetary Fund (IMF) also emphasized that the central banks should not let up despite initial successes in their fight against high consumer prices. The battle is not yet won.
“A phased approach gives Fed officials more time to assess how much interest rates need to rise and how long they need to stay higher to fully control inflation,” wrote the New York Times. However, the strong labor market in the USA remains a problem. Unemployment fell surprisingly at the end of last year and had reached its lowest level in almost three years. In December, the unemployment rate fell to 3.5 percent. Wages rose less than expected. However, there is always the danger of a wage-price spiral when there is a shortage of workers in important sectors and consumer prices are persistently high.
Keeping inflation in check is the classic task of central banks. In the medium term, the Fed is aiming for an average inflation rate of around 2 percent. If interest rates rise, private individuals and businesses have to spend more money on loans – or they borrow less money. Growth is slowing, companies cannot simply pass on higher prices, and ideally inflation is falling. With such a tight monetary policy, however, the risk also increases that the central bank slows down the economy so much that it stalls. However, the US economy had grown surprisingly strongly at the end of last year, which further reduced concerns about a possible recession.
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WASHINGTON (dpa-AFX)
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