The US Federal Reserve raises interest rates significantly

Created: 05/04/2022Updated: 05/04/2022 8:21 PM

People walk past the US Federal Reserve.

© Ting Shen/XinHua/dpa

The high inflation rate is forcing the US Federal Reserve to act.

It raises its key interest rate unusually quickly.

Further increases are likely to follow soon.

However, this could dampen the economy.

Washington - To combat the high inflation rate, the US Federal Reserve has increased its key interest rate sharply by 0.5 percentage points.

The interest rate is now in the range of 0.75 to 1 percent, as the Federal Reserve (Fed) announced on Wednesday.

It was the second interest rate increase since the beginning of the corona pandemic - and the first increase of 0.5 percentage points in 22 years.

Usually, the Fed prefers to raise interest rates in 0.25 percentage point increments.

The recent decision by the Governing Council was largely expected by the markets.

The consequences of the Russian war of aggression in Ukraine, for example with regard to the energy and food markets, are increasing inflationary pressure and are likely to weigh on the economy, the Fed said.

The corona lockdowns in China are also likely to cause new problems in global supply chains, which could affect inflation and growth.

The Central Bank Council is therefore very focused on the inflation risks, it said.

Inflation rate higher than it has been for a long time

The Fed is currently under a lot of pressure because the inflation rate is at its highest level in decades.

Persistently high inflation is reducing consumers' purchasing power.

In March, for example, prices rose by 8.5 percent compared to the same month last year.

Analysts therefore expect further rate hikes this year.

According to observers, the key interest rate could be at or just above 2 percent by the end of the year.

The Fed also wants to quickly reduce its balance sheet, which has swollen to around nine trillion US dollars as a result of the Corona emergency programs, from June onwards.

This will withdraw further liquidity from the markets and make credit more expensive.

Federal Reserve Chairman Jerome Powell said at the end of April that the aim was to use the central bank's tools in such a way that supply and demand adjusted again and inflation fell.

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.

Economic growth is weakened

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 dangerous 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.

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.

more on the subject

Fight against inflation: US central bank before interest rate hike

Because of rapidly rising inflation: US central bank makes big interest rate move

Central banks in a bind due to high inflation

In view of the high inflation rate, the Fed stopped buying securities worth billions 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.

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

dpa