Economy
US central bankers signal an imminent increase in the key interest rate
Federal Reserve Chairman Jerome Powell in Washington. Photo: Graeme Jennings / Pool Washington Examiner / AP / dpa
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US inflation is higher than it has been in decades. The economy and the labor market are now buzzing again. The US Federal Reserve is therefore preparing the markets for interest rate hikes.
In view of the good economic development and the high inflation rate, US Federal Reserve Chairman Jerome Powell has signaled an increase in the key interest rate for the period from March onwards.
The Federal Reserve (Fed) will complete its billion dollar bond purchases in March and then “raise the key rate in the course of the year,” Powell said on Tuesday at a hearing in the US Senate. Later in the year, the Fed’s balance sheet should also be quickly reduced.
Powell emphasized that the labor market has largely recovered from the Corona crisis. The greatest danger is no longer a lack of jobs, but rather inflation. “If this high level of inflation takes hold in the economy and in people’s minds, it will inevitably lead to a much tighter monetary policy on our part, which could lead to a recession,” warned Federal Reserve Chairman Jerome Powell in the Senate. “That would be bad for workers,” he added. The Fed is committed to the goals of price stability and full employment. December inflation data will be released this Wednesday.
Another member of the US Federal Reserve, Loretta Mester, signaled the first rate hike for March. “I think there is a lot to be said for scaling back the easing measures,” said the Cleveland central bank president to Bloomberg Television. If the economy looks like it does now in March, she would advocate a rate hike. It would be the first rate hike since the pandemic began.
A third member of the central bank, Esther George, also spoke out on Tuesday for a quick turnaround in monetary policy. “Although the pandemic continues to affect economic activity, the time has come to return monetary policy from the current crisis position in the interests of long-term stability to a more normal position,” said the governor of the regional central bank of Kansas, according to a speech. She also demanded that the Fed reduce its balance sheet, which has swollen from the crisis measures, by more than eight trillion US dollars. The head of the Atlanta Fed, Raphael Bostic, made a similar statement.
Analyst Paul Ashworth of the Capital Economics consultancy said Powell’s statements in the Senate suggested that the first rate hike could happen as early as March. He had previously assumed an increase in June. By the end of the year, the key interest rate could now rise to a range of 1.0 percent to 1.25 percent, he said.
The Fed can curb inflation by increasing the key interest rate, but at the same time the economy will also suffer from the tighter monetary policy. Powell restricted, the decisions of the central bank also continued to depend on current economic data. There are potential risks to both growth and high inflation that the Fed needs to consider, Powell said.
After the central bank council meeting in December, the Fed forecast three rate hikes for 2022. The next meeting of the central bankers is expected to end on January 26th. The top representatives of the central bank usually no longer express themselves publicly two weeks before the meeting. The statements on Tuesday regarding a tighter monetary policy stance came just before the period of silence. At the January meeting, observers expect signals for the decisions of the Central Bank Council to be made in March.