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Economy: US Federal Reserve leaves interest rates untouched

2022-01-26T19:22:40.721Z


According to many experts, inflation and the development on the labor market would actually have suggested more significant interest rate hikes. But the Federal Reserve Board decided otherwise.


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Fed Chair Powell: Removing liquidity from the market

Photo: JIM LO SCALZO/EPA-EFE/REX

The US Federal Reserve does not want to tighten the interest rate screw for the time being.

The key interest rate will remain in the range of zero to 0.25 percent, the Federal Reserve announced on Wednesday after its interest rate meeting in Washington.

Analysts expect the first interest rate increase since the beginning of the corona pandemic at the next meeting in March.

Because regardless of the current decision, the U-turn towards a tighter monetary policy has already been initiated.

Monthly asset purchases of up to $120 billion to provide liquidity to financial markets and prop up the economy are set to phase out after being tapered in March.

And in mid-January, US Federal Reserve Chairman Jerome Powell said that once the bond purchases were complete, it was time to “raise interest rates over the course of the year”.

As a result, the Fed's balance sheet, which has been swollen by crisis programs, is to be quickly reduced, which will further withdraw liquidity from the markets.

distress in the labor market

The main goals to which the Fed is committed are price stability and full employment.

The labor market is developing very positively: the unemployment rate fell to 3.9 percent in December and many companies are already complaining about a lack of applicants.

Before the corona crisis, the unemployment rate was 3.5 percent, the lowest level in decades.

However, inflation is causing problems for the Fed.

Until the end of last year, the central bank still described the high inflation rate as a “temporary” phenomenon as a result of the corona crisis.

But prices have been rising for months, which is why the Fed is now tightening monetary policy more quickly.

An increase in the key interest rate would curb inflation, but also slow down economic growth.

Inflation rose to 7 percent in December compared to a year earlier.

This is the highest value in decades.

Among other things, experts blame the rapid economic recovery from the corona crisis, generous economic stimulus programs and interruptions in global supply chains for the rise in prices.

Danger for Biden

Inflation is also a problem for President Joe Biden, with many voters blaming the government for it.

Put simply, one could say: the higher the prices, the more Biden's poll numbers fall.

This is causing problems for the President and his Democrats, who are trying to defend their slim majorities in both chambers of Parliament in the congressional elections in November.

Although many people in surveys express dissatisfaction with economic development, the US economy has been booming so far: on Thursday the government will announce the first estimate of gross domestic product (GDP) growth in 2021.

Treasury Secretary Janet Yellen expects rapid growth of around 5.3 percent, while the Fed most recently expected growth of 5.5 percent.

Somewhat in the shadow of the Federal Reserve, Canada's central bank has already announced its decisions.

It has not raised its key interest rate despite high inflation.

It remains at 0.25 percent, which is what the majority of analysts had expected.

In its statement, however, the central bank gave indications of an imminent interest rate hike: "The economy started 2022 with considerable momentum and a wide range of indicators now suggest that the economic slowdown has been reversed." The yield on 10-year Canadian government bonds initially came under significant pressure after the interest rate decision, but made up for some of the losses as trading progressed.

mik/dpa-AFX

Source: spiegel

All business articles on 2022-01-26

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