The end of the increases is approaching
Fed defies banking turmoil – key rate hiked again
3/22/2023, 7:03 p.m
The primary goal of the US Federal Reserve is to keep the inflation rate in check. And it’s still off target. That is why the monetary watchdogs are continuing to turn the interest rate screw. However, they signal that this path could end in the foreseeable future.
The central banks in the euro area and in the USA are not letting the turbulence in the banking sector deter them from their interest rate tightening course. As expected, the US Federal Reserve raised interest rates by a further 0.25 points. it is now in the range of 4.75 to 5.0 percent. The frequent problems of regional banks in the USA, such as the Californian SVB, which has slipped into bankruptcy, are also seen as a result of the rapidly increasing interest rates to combat inflation. The turbulence has recently given rise to speculation that the central bank of the world’s largest economy could now pause after around a year of interest rate hikes.
However, the inflation rate remains high and, despite the recent decline, is still well above the Fed’s target of 2.0 percent at 6.0 percent. The currency watchdogs have now signaled that they want to continue to defy the upward trend in prices. In their updated projections, the monetary watchdogs are now estimating an average interest rate level of 5.1 percent for the end of the year – just as they had already targeted in December.
“The Council understands that further tightening of monetary policy may be appropriate,” the statement said. However, central bankers dropped a phrasing used in the eight previous statements that said the Council believed “steady increases” in interest rates would be appropriate. In addition to getting closer to the projection, this is the second signal that the central bankers consider the interest rate peak to be within reach.
More inflation, less growth
At the same time, the monetary watchdogs raised their inflation expectations and are now expecting a slightly higher rate this year than assumed three months ago. Despite the increases in the key interest rate, it should average 3.3 percent, an increase of 0.2 points on the previous forecast from December.
Meanwhile, the Fed is lowering its expectations for economic growth. Gross domestic product (GDP) is expected to grow by 0.4 percent. That would be 0.1 percentage points less than forecast in December. For the coming year, the Fed is lowering its forecast by 0.4 points to an economic growth of just 1.2 percent.
LBBW believes that the Fed’s ninth consecutive interest rate hike “may have been more difficult given the recent turbulence in the banks”. The fight against inflation, which is far too high, still outweighs the increased risks to financial stability. However, the more cautious interest rate outlook shows “that a pause in the tightening of monetary policy is closer because the bank turbulence is increasing the economic risks”. For the May meeting, LBBW therefore expects a step of only 0.25 points again, provided that the turbulence on the financial markets calms down over the long term.
The European Central Bank (ECB) recently raised its interest rates by 50 basis points, sticking to the plans it made before the banking crisis began. Against this backdrop, a decision by the Fed not to raise interest rates in March would have sent the signal that the Federal Reserve is easing its fight against inflation in favor of banking chaos over broad-based inflation.