Jerome Powell, Chairman of the U.S. Federal Reserve. © Jacquelyn Martin/AP/dpa
The U.S. Federal Reserve has not raised its key interest rate again - but the fight against high inflation is far from over. This should also be made clear by the upcoming ECB interest rate decision.
Washington/Frankfurt/Main - After a pause in interest rates by the US Federal Reserve, the European Central Bank (ECB) is heading for a further increase in the key interest rate in the fight against high inflation. Most economists expect a moderate increase in key interest rates in the euro area by 0.25 percentage points. The central bank will announce the decision of the ECB Governing Council this afternoon.
On Wednesday, after ten interest rate hikes in a row, the Fed left the key interest rate in the range of 5.0 to 5.25 percent for the time being. But the central bank of the largest economy made it clear that this is far from the end of the strict monetary policy. The Fed signaled at least two more hikes this year.
Historical tightening periods
It could make sense to raise interest rates, but at a more moderate pace, said Fed Chairman Jerome Powell. They will be re-evaluated from session to session. But interest rate cuts can only be talked about at a time when high consumer prices are falling significantly. "We're talking about a few years in the future." Since March 2022, the Fed has raised its key interest rate by a total of five percentage points in the fight against higher consumer prices. The cycle is considered one of the fastest and sharpest tightening periods in Fed history.
After years of zero and negative interest rates, the ECB has also raised interest rates seven times in a row since July 2022 in the face of stubbornly high inflation. The key interest rate, at which commercial banks can obtain fresh central bank money, is now 3.75 percent. "Price pressures remain strong," ECB President Christine Lagarde said recently. "Our future decisions will ensure that policy rates are brought to a sufficiently restrictive level."
A balancing act
Keeping inflation in check is the classic task of central banks. The Fed and the ECB are aiming for price stability with an inflation rate of 2 percent in the medium term. With the significant increases in interest rates, central banks have tried to reduce high consumer prices. Because if interest rates rise, private individuals and businesses have to spend more on loans - or borrow less money. Growth is slowing, companies cannot pass on higher prices indefinitely - and so the inflation rate will ideally fall again. At the same time, there is a risk that the economy will be strangled.
In May, the inflation rate in the currency area of the 20 euro countries was 6.1 percent, according to an initial estimate by the statistics office Eurostat - after 7.0 percent in April. In the US, too, the rise in consumer prices slowed noticeably in May. They rose by 4.0 percent compared to the same month last year - the lowest rate since March 2021. The Fed expects an average inflation rate of 3.2 percent in the US this year and 2.5 percent next year. Central bankers do not forecast 2025.2 percent until 1.
Dow Jones recovers somewhat at the close of trading
Investors on the New York stock exchanges were somewhat relaxed about the Fed's interest rate decision. The Dow Jones Industrial, the leading index, which had already been weakening before, extended its loss to just under 1.3 percent, but was then able to recover somewhat. At the end of trading, the price boards still showed a minus of 0.68 percent to 33,979.33 points. Thomas Altmann of asset manager QC Partners called the interest rate pause "at least a small turning point". But the Fed is "leaving the door wide open for further hikes much more than a crack." Dpa