The United States’ central bank, the Federal Reserve, will continue to raise interest rates and keep them high until inflation is reduced. Even if this policy will lead to a period of low economic growth and a deteriorating labor market. This is what Jerome Powell, the chairman of the Fed, said Friday in a speech at the annual meeting of central bankers and scientists from around the world in the American city of Jackson Hole.
In the speech, which the financial markets had been eagerly awaiting all week, Powell mainly sought to allay concerns that the central bank would cut interest rates again too soon once high inflation, now close to 9 percent year on year, begins to fall. Powell stressed that price stability, commonly defined as inflation around 2 percent, is the “foundation” of the economy. Getting back to that point, he says, will take time and “vigorous” use of the tools – especially money market rates – available to the Fed.
Interest at 4 percent
This year, the Fed has already raised its key interest rate from nearly 0 percent to between 2.25 and 2.5 percent. Powell pointed out that the average expectation among Fed board members is that interest rates will be near 4 percent next year. According to him, it must be prevented that the high inflation of today becomes permanent and that it subsequently becomes much more difficult to lower it again.
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Powell repeatedly referred to the 1970s, when inflation also soared. A late response by the central bank then required a policy of large interest rate hikes, after which interest rates had to remain relatively high for 15 years in order to structurally lower the inflation expectations of the public and business.
In the eurozone, where inflation is also close to 9 percent, the European Central Bank (ECB) has so far taken it much easier. The ECB raised interest rates from 0 percent to 0.5 percent in July.