The U.S. Federal Reserve (Fed) in Washington. © Pablo Martinez Monsivais/AP/dpa
Galloping inflation has cooled somewhat in the US - the US Federal Reserve is now reacting to this with a change of course. After all, their strict monetary policy in the fight against high consumer prices is not without risks.
Washington - The U.S. Federal Reserve (Fed) is taking a break after ten consecutive interest rate hikes. This means that it will leave its key interest rate in the range of 5.0 to 5.25 percent, as the Central Bank Council decided on Wednesday.
Since March 2022, the Fed has raised its key interest rate by a total of five percentage points in the fight against high consumer prices. The cycle is considered one of the fastest and sharpest tightening periods in Fed history. However, the central bank is already hinting that the pause will be followed by further interest rate hikes this year.
Consumer price growth has slowed
The Fed is likely to have been given a tailwind for not raising the key interest rate now by the new inflation data. According to the U.S. government, the rise in consumer prices in the U.S. slowed noticeably in May. They rose by 4.0 percent compared to the same month last year. This rate is the lowest since March 2021.
The inflation rate had risen to a good nine percent last year. Now the US Federal Reserve has also published new estimates of the inflation rate. It expects the inflation rate in the current year to be slightly lower than previously assumed. The average inflation rate is expected to be 3.2 percent. The Fed's desired inflation rate in the medium term is two percent.
Keeping inflation in check is the classic task of central banks. If interest rates rise, private individuals and businesses will have to spend more on loans - or borrow less money. Growth is slowing, companies cannot pass on higher prices indefinitely - and ideally the inflation rate will fall. At the same time, there is a risk that the economy will be strangled. The Fed is now forecasting slightly higher economic growth this year than expected three months ago. The gross domestic product (GDP) of the world's largest economy will grow by one percent in 2023. That would be 0.6 percentage points more than forecast in March.
Further rate hikes are likely to follow
Fed Chairman Jerome Powell had already opened the door to a possible interest rate pause after the May meeting, but did not commit himself. At the time, he made it clear that interest rate cuts were not to be expected in the foreseeable future. The Fed's decision-makers now expect an average key interest rate of 5.6 percent at the end of the year - in March it was still 5.1 percent. For 2024, an average of 4.6 percent is expected. The Fed's interest rate hikes are unlikely to have had their full effect yet, as they are only having a delayed effect.
And so central bankers are likely to be cautious about the government's current inflation data. This is because the decline is primarily the result of falling energy and raw material prices. Core inflation, which is less volatile, has fallen only slowly until recently. Another problem for the Fed is the strong US labor market. This is because it can drive up inflation because low unemployment strengthens the bargaining position of employees in wage negotiations. Dpa