Fed relies on strict monetary policy - ECB ahead of interest rate hike
Created: 2022-12-14Updated: 2022-12-15 04:21
The European Central Bank has announced a further increase in key interest rates in the euro zone.
© Boris Roessler/dpa
The Fed tightened interest rates significantly.
However, the pressure on the US Federal Reserve remains high due to high consumer prices.
A looser monetary policy is not in sight.
The situation is similar at the ECB.
Washington - After a somewhat more moderate interest rate hike by the US Federal Reserve (Fed) than recently, the decision by the European Central Bank (ECB) is eagerly awaited.
As expected, the Fed raised its key interest rate by 0.5 percentage points on Wednesday in the fight against inflation.
The rate hike was smaller than after the previous central bank meetings, but it is still significant.
The key interest rate is now in the range of 4.25 to 4.50 percent - this is the highest level in 15 years.
Fed Chair Jerome Powell also made it clear that further hikes are on the cards for the coming year.
The ECB is also likely to continue its fight against inflation at a reduced pace at its interest rate meeting this Thursday.
After two rate hikes of 0.75 percentage points each, most bank economists expect tightening by 0.5 points.
The hikes have been in place since the summer - albeit after a lengthy phase in which the monetary watchdogs had only hoped for a temporary surge in inflation and hesitated before raising interest rates.
In November, inflation in the currency area of the 19 euro countries was 10 percent.
Inflation in the euro area peaked at 10.6 percent in October.
In the US, the new inflation data from the Department of Labor for November was rather optimistic.
They showed the fifth decline in the inflation rate in a row.
Long-term estimates of consumer prices, however, show that long-term inflation is still a long way from the 2 percent that the Fed wants.
The central bank estimates that inflation will average 5.6 percent this year.
This indicates that the dynamics of the price increase are slowing down.
But for 2023, the Fed forecasts an average inflation rate of 3.1 percent, for 2024 it will still be 2.5 percent.
Unemployment expected to rise
"We continue to believe that further increases are appropriate," Powell said.
At the moment, there are simply not enough signs to be sure that inflation is falling on a sustained basis - quite the contrary.
The Fed also anticipates a sharp slowdown in economic growth.
It is now predicting significantly lower growth for the coming year than was assumed just three months ago.
The gross domestic product (GDP) of the world's largest economy will only grow by 0.5 percent in 2023.
"I don't think anybody knows if there's going to be a recession or not," the Fed chairman said.
And if there is one, there is no telling how intense it will be.
The Fed also expects unemployment to rise significantly.
This suggests that tight monetary policy will come at a high cost to the economy as a whole.
The interest rate hikes are helping to lower inflation, but they are also slowing down economic growth.
With the Fed's tight monetary policy, there is a growing risk that the bank will slow down the economy so severely that the job market and economy are stalled.
This is one of the reasons why the Fed is now likely to opt for more moderate rate hikes.
Most recently, the Fed had raised the key interest rate by an impressive 0.75 percentage points four times in a row - it is now the seventh increase this year.
Fed Chairman Powell had already indicated in November that the unusually large jump of 0.75 percentage points could at least be over.
The Fed's next decision will come in February.
"At a certain point, how long do we stay restrictive becomes the most important question," Powell said.
"But I would say the most important issue is no longer speed."
Delayed effects of rate hikes
It is clear, however, that cuts in the key interest rate in the USA are not pending.
The question now will be how long interest rates will have to remain high before consumer prices start to fall permanently.
"We've come a long way and the full impact of our rapid streamlining has yet to be felt," Powell said.
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A turbulent year lies behind the US Federal Reserve.
The drastic measures are the result of inflation, which at times was higher than it had been in decades.
The Fed has struggled to keep pace with rising consumer prices and has been taking interest rate hikes at an unusual pace.
At first there seemed to be no success.
This is also due to the fact that the Fed's interest rate decisions only take effect with a delay.
And so the full force of the unusually large rate hikes could only be felt in the coming year.
The euro zone is also facing an economically difficult winter half-year, to which the ECB is likely to react with a slightly less strict monetary policy.
The high - and since the outbreak of the war reduced - dependency on Russian energy supplies has hit the economic area unprepared and hard.
In addition, there are ongoing problems in world trade, although there is some light at the end of the tunnel.