- The US Federal Reserve (Fed) is fighting stubbornly high inflation with the fourth major rate hike in a row.
- It raised the key interest rate again by three-quarters of a percentage point – to the new range of 3.75 to 4.00 percent.
- This was expected on the financial markets. Because the currency watchdogs around Fed boss Jerome Powell are under pressure to act with an inflation rate of 8.2 percent recently.
The US Federal Reserve has always used the solid labor market as an argument against the economy sliding into a deep recession. Many companies complain about a shortage of workers. The economy also grew somewhat more strongly than expected in the summer. Biden took this as evidence of economic recovery and people’s resilience. The economy had shrunk in the first half of the year.
It is the sixth rate hike this year. The Fed is thus continuing to tighten interest rates and is continuing its fight against inflation, but has indicated smaller interest rate hikes in the future.
The pressure on the central bank is great because the inflation rate remains stubbornly at a comparatively high level. It was the penultimate Fed meeting of the year – another meeting is scheduled for December. Looking ahead to the November 8 congressional election, consumer prices are also a drag on President Joe Biden and his Democrats. In the elections, the Democrats could lose their already narrow majority in Congress.
Inflation has mutated into an election campaign issue
Surveys show that people are particularly concerned about inflation. According to the surveys, many voters see the Republicans ahead when it comes to economic competence. During the election campaign, they denounce inflation for which they blame the Democrats, while it is also a consequence of the Russian war against Ukraine.
Legend:
Analysts are puzzled as to whether the Fed will maintain this pace through the end of the year.
Reuters/Archives/CHRIS WATTIE
At the same time, the tighter monetary policy increases the risk that the central bank will slow down the economy so much that the labor market and economy will be stalled. Because if interest rates rise, private individuals and businesses have to spend more money on loans – or they borrow less money. Growth is slowing, companies cannot simply pass on higher prices, and ideally inflation is falling. However, some fear that the Fed is overdoing it – and steering the world’s largest economy into a recession.
Will this continue at the end of the year?
In view of mixed signals from the economy, investors are puzzling over whether the central bank will slow down its interest rate hikes at the end of the year or maintain the pace. The Fed did not let its cards be looked at and declared that it would keep an eye on economic and financial developments as it continued to tighten its pace.
Legend:
Statements by Fed Chair Jerome Powell are weighed down with a view to the pace of interest rate hikes.
Reuters/Archives/KEVIN LAMARQUE
Some economists expect that the US economy will run out of breath as interest rates rise and that a recession will break out. Despite high inflation and rising interest rates, gross domestic product continued to grow in the summer. However, the real estate market is now cooling down, while the labor market is still robust.