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It’s been 70 years since anyone successfully did what Fed Chair Jerome Powell has to do. 1951 was the last time US policymakers managed to lower inflation from a comparably high level without plunging the country into a recession. This was pointed out by the chief economist at New York’s Mellon Bank shortly before the latest interest rate decision.
Inflation in the USA is currently over nine percent. Higher interest rates are the strongest medicine against it. But the starting point is delicate: if interest rates rise, loans become more expensive. As a result, companies slow down when it comes to credit-financed investments, private individuals when it comes to credit-financed consumption. Both slow down economic growth.
But not enough money from the Corona period
In the world’s largest economy, the fact that the desire to buy is declining is no longer a future scenario, it’s a fact. High prices don’t just bother people at the pump for a long time. The retail giant Walmart had to issue a profit warning earlier this week, the second in two months.
Customers only buy what they really need, and high inflation is obviously making them more selective. The long-cherished hope that Americans will have enough money in their pockets to fulfill all their purchase wishes after the forced frugal Corona period turns out to be wishful thinking.
Is the US already in a recession?
From a purely technical point of view, the USA may already be in a recession. This if it turns out today Thursday that the country’s gross domestic product actually shrank not only in the first but also in the second quarter.
Massively raise interest rates without stalling the economy? The odds of Powell making it are slim. Now it’s taking its revenge that he – like other central bankers – underestimated inflation for a long time, dismissing it as a temporary phenomenon. Now he has to bring her down from a record nine percent.
Massive rate hike also has a good side
But Powell has achieved something else with his attempt to master the squaring of the circle: He is preparing the ground for further interest rate hikes by the central banks in Europe, the European Central Bank and the Swiss National Bank. And they will follow the US, statements by local central bank heads leave little doubt.
Against this background, Powell’s massive interest rate hike has a good side: any measure that leads to a fall in inflation rates in our part of the world is to be welcomed. This is the only way to silence the calls from some politicians for measures that are questionable in terms of the market economy (because they distort competition), such as the government-propagated cap on petrol prices.