Fight against rapidly rising inflation: US central bank before major rate hike

Created: 05/04/2022, 16:15

US Federal Reserve: The Fed is facing the sharpest rate hike in 22 years.

© Imago/Ting Shen

In the USA, the rate of inflation is currently rising even faster than in Europe.

The US Federal Reserve is therefore facing a groundbreaking decision, also for the euro zone and Germany. 

Washington – In the fight against further rising inflation rates, the US Federal Reserve is facing an unusually large interest rate move.

According to numerous experts, the Fed is likely to decide to raise the key interest rate by 0.5 percentage points to between 0.75 and 1 percent at its meeting on Wednesday (May 4).

It would be the highest increase in 22 years.

The US Federal Reserve usually raises interest rates in increments of 0.25 percentage points.

Following the meeting of the Central Bank Council, central bank chief Jerome Powell will explain the motives of the Fed to journalists and give an outlook on the further course of monetary policy (8:30 p.m. CEST).

US Federal Reserve under increasing pressure

The pressure on the Fed is currently great because the inflation rate in the world's largest economy is at its highest level in decades.

This eats into the purchasing power of consumers.

Analysts expect several more rate hikes this year.

The Fed also wants to quickly reduce its balance sheet, which has swollen to around USD 9 trillion as a result of the Corona emergency programs, which would withdraw further liquidity from the markets.

Analysts expect details on the planned dismantling this Wednesday.

Powell had signaled relatively clearly at the end of April that an increase of 0.5 percentage points can be expected at the meeting of the Federal Reserve Board.

In view of the high inflation rate and robust economic development, it is "appropriate to move a little faster," said Powell.

The aim is to use the central bank's tools in such a way that supply and demand adjust again and inflation goes down.

The economy should cool down in a way that does not correspond to a "recession".

The balancing act won't be easy, he said.

“It will be a big challenge.

We'll do our very best to make that happen," Powell promised.

US Federal Reserve before difficult balancing act

Increases in the key interest rate make credit more expensive and curb demand.

This helps bring down the rate of inflation, but it also weakens economic growth.

It is therefore a balancing act for the central bank: it wants to raise interest rates so much that inflation is slowed down - without stalling the economy and the labor market at the same time.

Another challenge for the central bank is that it can only influence some causes of price increases to a limited extent.

The disruptions in global supply chains and rising energy prices, for example, do not react directly to the key interest rate.

US Federal Reserve: Monetary custodian with limited influence

The Fed can hardly control the consequences of the war in Ukraine or new corona lockdowns in China for the inflation rate in the USA.

The Fed stopped buying billions of securities in March and raised its key interest rate by 0.25 percentage points for the first time since the Corona crisis.

The last time there was an increase of 0.5 percentage points was 22 years ago.

As a result, the interest rate rose to 6.5 percent in May 2000 - shortly before the Internet bubble burst, the consequences of which led to a series of reductions in the key interest rate from 2001 onwards.

The Fed is committed to the goals of price stability and full employment.

The US economy is now booming again, with the unemployment rate recently falling to a low 3.6 percent.

Many companies are already complaining about a shortage of workers.

However, consumer prices have been rising rapidly for months.

In March, they rose by 8.5 percent compared to the same month last year.

The Fed is aiming for an inflation rate of two percent in the medium term.

The European Central Bank (ECB) also has this goal.

The key interest rate in the currency area of ​​the 19 countries has been at a record low of zero percent for around six years now.

In view of the record inflation, a first interest rate hike in the euro area is now expected this summer.

Several members of the Governing Council had recently not ruled out an increase in July.

Leading economists are also calling for a change of course.

It is "high time to act", wrote the former economics expert Prof. Volker Wieland in a guest article with a view to the ECB.