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Increase by 0.75 percentage points – Another “XXL step” by the US Federal Reserve in the key interest rate – News

22 September 2022

To combat the high rate of inflation, the US Federal Reserve increased its key interest rate by 0.75 percentage points for the third time in a row.
It is now in the range of 3 to 3.25 percent, as the Federal Reserve (Fed) announced.
Analysts had largely expected this move.

The central bank had already raised interest rates by 0.75 percentage points in June and July. The Fed has raised interest rates five times this year. At the beginning of the year it was still in a range of 0.0 to 0.25 percent.

The background to the significant tightening is the very high inflation. In August, the inflation rate in the US was 8.3 percent. The Fed is targeting a rate of just 2 percent.

Further increases announced

This is not the end of the story: further rate hikes should be appropriate, the Fed said. It signaled more rate hikes this year and next.

«It was a pretty wild ride on the stock exchange in the afternoon. It went up and down. Ultimately, the Dow Jones falls more than five hundred points. That’s a discount of almost two percent. This already shows that the stock market is not happy with this interest rate decision. The 75 basis points were expected. However, the fact that similar interest rate hikes are to be expected in the coming months caught many on the wrong foot.

Federal Reserve Chairman Jerome Powell has said it quite clearly: You can’t just wish inflation away. Fighting inflation is painful. But for whom? Painful for companies, because those with more expensive money should invest less, but also painful for the American population, because it is expected, even desired, that the unemployment rate will rise. The labor market is far too hot and that is one of the drivers of inflation. This is a difficult phase that is now facing US citizens.”

In addition, the US Federal Reserve expects significantly lower economic growth this year than assumed just three months ago. The gross domestic product (GDP) of the world’s largest economy is expected to grow by 0.2 percent. That would be 1.5 percentage points less than forecast in June. In the previous year, the economy had grown by a strong 5.7 percent as part of the recovery from the Corona crisis.

recession or not?

Whether the US has slipped into a recession is controversial. The US economy contracted again in the spring, data from late July shows. Since the economy had already contracted in the winter, the definition of a so-called technical recession has now been met. The US government downplayed the data and insisted that the situation on the job market was good. Economists had also emphasized that the numbers had to be treated with caution. However, Fed Chair Jerome Powell warned in July that the fight against high inflation would be painful.

Legend:

“It will likely take a period below potential growth to bring inflation down,” said Fed Chair Jerome Powell.

Reuters / ELIZABETH FRANTZ

Powell’s aggressive interest rate policy is already being compared to that of legendary Fed chairman Paul Volcker. Volcker raised interest rates drastically in the 1970s and 1980s – at times to around 20 percent. Even then, the world’s largest economy was struggling with enormous inflation.

However, the result of the interest rate hikes was unemployment and a slump in economic growth. Powell is still a long way from such a high interest rate. However, the pace that he is now setting in the fight against inflation is exceptional.