The Fed is Raising Interest Rates for the First Time Since 2018

The high inflation has triggered a turnaround in interest rates in the USA: The US Federal Reserve (Fed) has increased its key interest rate for the first time since the beginning of the corona pandemic. The key interest rate for the world’s largest economy rose by 0.25 percentage points and is now in the range of 0.25 to 0.5 percent, the central bank announced on Wednesday. The central bank assumes that further increases “will be appropriate”.

The about-face of the Fed‘s monetary policy had been expected because of the very high inflation rate that had persisted for months. According to a new forecast by the central bank, several interest rate hikes are to be expected this year. In December, decision-makers at the Fed were still assuming on average that the key interest rate would rise to 0.9 percent over the course of the year – now they are assuming 1.9 percent this year and even 2.8 percent next year. The Fed balance sheet, which has been swollen as a result of the Corona emergency programs, is also to be reduced soon, which would deprive the financial market of liquidity.

Fed expects further increases
Increases in the key interest rate slow down demand. This helps bring down the rate of inflation, but it also weakens economic growth. It is therefore a balancing act for the central bank: it wants to raise interest rates so much that inflation is slowed down – without stalling the economy at the same time.

The US Federal Reserve expects a significantly higher inflation rate in the current year than assumed just three months ago. Inflation is expected to average 4.1 percent in 2022, despite planned interest rate hikes, up 1.4 percentage points from the previous forecast in December, central bank data showed on Wednesday.

The Fed has had to revise its inflation forecasts upwards several times since the beginning of the corona pandemic. In September, for example, the Fed had an average inflation rate of just 2.2 percent for 2022.

Consumer prices rose by almost 8 percent in February compared to the previous year, the highest value in 40 years. In the medium term, the central bank is aiming for an average inflation rate of around 2 percent. The Fed is committed to the goals of price stability and full employment.

ECB sticks to negative deposit rate
With this step, the Fed is initiating the turnaround in interest rates in the USA. Meanwhile, interest rates in Europe remain at negative records. Last Friday, however, the European Central Bank (ECB) gave the first signals that interest rates could be raised before the end of this year.

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