This balances for the US Federal Reserve: inflation is too high, central bankers have to act. But it’s a risky venture – after all, they don’t want to slow down the economy.
The US Federal Reserve will raise its key interest rate a second time to combat high inflation. The decision of the Federal Reserve (Fed) on the future direction of monetary policy will be announced today.
Another rate hike of 0.75 percentage points is expected to a range of 2.25 to 2.5 percent. In June, the Fed raised interest rates by 0.75 percentage points. It was the largest rate hike since 1994, ie in almost 30 years. The Fed usually prefers to raise interest rates in steps of 0.25 percentage points.
Act on lines for central bankers
All in all, this would be the fourth rate hike since the onset of the coronavirus pandemic. The pressure on the central bank is enormous: the inflation rate in the US is 9.1 percent, the highest in about four decades, reducing consumer purchasing power. Central bank increases in key interest rates make loans more expensive and slow down demand. This helps to lower the inflation rate but also weakens economic growth. It’s balancing on the line for central bankers.
Because many people in the US are driven by fear of recession. “We won’t have a recession,” US President Joe Biden said recently. “Hopefully we’ll move from fast growth to steady growth and see a slowdown. But I don’t think God’s will will lead to a recession. ” US Treasury Secretary Janet Yellen made a similar statement. “We have a very strong job market,” she said on American television. The economy is currently in a transition phase – growth is slowing.
Growing unemployment rate
Analysts are much more skeptical about the risk of a recession. “I don’t think the Fed will be able to raise interest rates beyond December as employment is likely to plunge sharply, which should be a big red flag for the Fed,” quotes economist Thomas Costerg of Pictet Wealth, US broadcaster CNBC. Management. Fed chairman Jerome Powell indicated in June that he saw at least a slight increase in unemployment as a necessary compromise in the fight against high inflation.
When interest rates rise, citizens and businesses borrow less or have to spend more to borrow. As a result, growth slows down and companies can no longer simply pass on higher prices. The goal is to reduce demand over time to allow prices to fall and stabilize. Result: Inflation drops. However, if growth slows down too quickly, the US could fall into a recession. A recession is a general economic slowdown.
The swift moves of the Fed should now show central bankers are determined to contain inflation, the New York Times writes. The goal is to convince businesses and families that the current inflation will not be sustained. Because it becomes problematic when people’s behavior changes as they expect inflation to be sustained high. The workers would then demand higher wages. In return, companies would raise prices to cover rising labor costs. Prices will go up.
Inflation should drop slightly
At least now, July’s US inflation data are expected to send the first positive signal. They will be released in August – inflation should at least drop slightly then, as gasoline prices in the US have fallen again recently. However, it is expected that the central bank of the largest economy will continue to raise its key interest rate to around 3.5%. This would be the highest figure since 2008.
The International Monetary Fund (IMF) recently called on central banks to stick to tight monetary policies to contain inflation. The European Central Bank also announced last week that interest rates would rise by 0.50 percentage points. The IMF recently downgraded its global growth forecast on the back of “stubbornly high” inflation, and now forecasts weaker growth for this year than in April. (dpa)