US Federal Reserve raises interest rate again - drastic consequences for "unsustainably hot" labor market?

Created: 2022-07-27Updated: 2022-07-28 09:54

It's a balancing act for the US Federal Reserve: Inflation is too high, the central bankers have to act.

The Fed is now planning another big rate hike.

Washington – In view of the high inflation, the US Federal Reserve is again raising its key interest rate sharply by 0.75 percentage points.

It is now in the range of 2.25 to 2.5 percent, as the Federal Reserve (Fed) announced on Wednesday.

With this measure, the central bank of the world's largest economy wants to get the high consumer prices under control.

The US Federal Reserve raised interest rates in June

The tight monetary policy is not without risk for the central bankers – they have to be careful not to slow down economic growth too much.

The once again unusually large rate hike is stoking fears of a recession.

In June, the Fed raised interest rates by 0.75 percentage points.

It was the largest rate hike since 1994, i.e. for almost 30 years.

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

Overall, it is the fourth rate hike this year and since the start of the coronavirus pandemic.

The pressure on the central bank is great: at 9.1 percent, the rate of inflation in the USA is the highest it has been in around four decades.

Fed raises interest rates: is the unemployment rate rising now?

Increases in the key interest rate by the central bank make loans more expensive and slow down demand.

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

This is also likely to result in a higher unemployment rate.

At 3.6 percent, this is currently at a very low level in the USA: According to the Department of Labor, around 5.9 million people were unemployed in June.

Before the outbreak of the corona pandemic in February 2020, there were 5.7 million.

US President Joe Biden boasts about the low numbers and sees them as a success for his administration.

In the past, however, Fed Chair Jerome Powell has described this job market as “unsustainably hot”.

Because many companies in the USA are desperately looking for workers - this means that wages are rising, which in turn drives up prices.

Powell had already made it clear that slightly higher unemployment figures were a necessary evil for him in the fight against high inflation.

The Fed should now also want to send a clear signal with its tight monetary policy.

It's about convincing businesses and families that the current inflation will not last.

Because if people expect high inflation in the long term, sooner or later they will demand higher salaries.

In return, companies raise prices to cover rising labor costs.

As a result, prices keep going up.

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The US Federal Reserve has raised interest rates.

This is how she wants to counteract inflation.

© IMAGO / Dean Pictures

Big concern: recession could be imminent

This is exactly what the Fed wants to prevent with its policy.

However, it must be careful not to slow down economic growth too quickly.

Then the USA could slide into a recession.

A recession is a general economic downturn.

US President Biden and Treasury Secretary Janet Yellen had recently reassured them again and again.

But economists are far more skeptical about the risk of a recession.

In addition, the Fed can only influence prices to a very limited extent with its interest rate policy.

Disruptions in global supply chains and rising energy prices are not directly responding to US interest rates.

The Fed is also unable to control the consequences of the Ukraine war and the corona lockdowns in China.

It is now at least expected that the US inflation data for July could send a first positive signal.

They will be published in August - the rate of inflation could then at least fall somewhat, as gasoline prices in the United States have recently fallen again.

The problem of high consumer prices has long been a political one.

The approval ratings for US President Biden are in the basement, he is being blamed for the high inflation.

At the same time, there are fears of an economic downturn in the USA.

According to a recent survey by the Morning Consult institute commissioned by Politico magazine, almost two-thirds of registered voters in the USA are of the opinion that the country is currently in a recession.