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Federal Reserve: What you need to know about the Federal Reserve's interest rate decision

2022-06-15T10:23:15.442Z

The US Federal Reserve will raise interest rates again in the evening. How high the step should be is hotly debated. One thing is certain: in three out of four cases in the past, rising interest rates have led the USA into a recession.



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Fighting inflation, preventing recession:

The US Federal Reserve headed by Jerome Powell must try to steer the inflation expectations of the Americans - and must not overdo it

Photo: OLIVIER DOULIERY / AFP

The US Federal Reserve is likely to resolutely continue and possibly even intensify its fight against high inflation this Wednesday.

A further interest rate hike of 0.50 percentage points is taken for granted on the financial markets, and many market participants are also expecting 0.75 points.

And observers are no longer ruling out even a full percentage point.

The central bank will announce its decision on Wednesday evening at 8:00 p.m. (CEST).

"I have a feeling the Fed will go 75 basis points instead of 50 because the data we got last week shows higher inflation and maybe even more worrying news about inflation expectations," the Wall Street Journal quoted as saying " Former and longtime New York Fed President William Dudley (69).

High inflation in the US is forcing the central bank to take increasingly decisive action.

While many experts had expected inflation to weaken somewhat towards the middle of the year, the opposite has recently happened.

In May, the inflation rate rose to 8.6 percent, a roughly 40-year high.

Analysts, on the other hand, had expected a slight weakening.

Fed must recapture inflation expectations

But analysts in the US who closely study central bank policy were divided on Tuesday on whether the potential costs outweigh the benefits of a more aggressive 0.75 percentage point rate hike.

If interest rates are raised too much, there is a risk of a recession.

The main reasons for the high inflation are sharply rising prices for energy and many raw materials.

The trigger is the Russian war in Ukraine.

In addition, there are ongoing problems in the international supply chains, which are also causing sharp price increases.

The central bank cannot counteract this development directly.

However, it can prevent inflation from spreading to other sectors of the economy and leading to second-round effects such as sharply rising wages.

The key antidote is the anchoring of inflation expectations.

Is the turnaround in interest rates coming too late?

The Fed has already tightened monetary policy, but in the opinion of many analysts it started too late.

Interest rates have been raised twice this year by a total of 0.75 percentage points.

The key interest rate is currently in a range of 0.75 to 1.0 percent.

The currency watchdogs stopped buying securities a long time ago and have also begun to gradually reduce their bloated balance sheet.

"It is becoming increasingly obvious that the central bankers are clearly lagging behind the dynamic development of inflation," says Carsten Mumm, chief economist at private bank Donner & Reuschel.

At the same time, the danger of a recession in the USA is increasing.

Every day with persistently high price increases is a burden on private consumption.

The positive effects of the almost fully utilized labor market and the significant increase in nominal wages were thus put into perspective.

Phases in which interest rates were tightened usually led to recession

Allison Boxer, US economist from asset manager Pimco, also sees a risk that the Fed will overstretch the tightening curve.

Jörg Krämer, chief economist at Commerzbank, also points out this danger.

Historically, three out of four Fed tightening periods have pushed the US economy into recession, says the economist.

In other words, there have been few episodes of rising interest rates over the past few decades that have not been accompanied by economic damage.

Such recession scenarios are increasingly being priced in on the financial markets.

rei/dpa-afx

Source: spiegel

All news articles on 2022-06-15

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