Fed raises interest rates by 75 basis points
The US Federal Reserve raised the Fed Funds target range by 75 basis points on Wednesday. The range is now between 1.50% and 1.75%.
In the fight against high inflation, the US monetary policymakers are now putting on pressure. The rate hike of 75 basis points reads like an exclamation mark. It is already the fourth in a row.
Don't forget: The Fed is also reducing its balance sheet. So, in addition to the interest rate hikes, there is another monetary policy instrument at work. More is hardly possible at the moment in the fight against the high inflation rate.
The Fed officials' projections, which were also published today, foresee a key interest rate of 3.4 % at the end of the year. That is 50 basis points higher than in March. The high is expected to be in the range of 3.8 % next year. According to these expectations, the key interest rate could fall again somewhat in 2024. The strongest rate hike will therefore be recorded in the current year.
In this context, Fed Chairman Jerome Powell once again made it clear that the interest rate path would continue to be data-dependent. This means that if inflation rates remain high for an unexpectedly long time, the Fed is likely to do more rather than too little. The ECB could take a cue from this.
The strong interest rate hikes combined with a considerable reduction in the balance sheet total will not remain without consequences for the US economy. A cooling economy or a recession would probably be the best countermeasures against high inflation rates.
If a greater supply of goods cannot be provided at the moment due to material shortages, demand will have to respond. Powell addressed this at the media conference. He spoke of the fact that demand must weaken. In case of doubt, a hard landing of the economy will be necessary to bring inflation rates to the target level of 2%.
The financial markets seem to be happy that the projections did not signal an even higher key interest rate level. A key interest rate high in the range of 3.8% seems to be acceptable.
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