Federal Reserve
US Federal Reserve leaves key interest rate unchanged
Fed Chairman Jerome Powell has repeatedly made it clear that he will raise the key interest rate or leave it at a high level until inflation is under control. photo
© Jacquelyn Martin/AP/dpa
The high consumer prices in the USA have cooled down somewhat – and so the US Federal Reserve Bank will not turn the interest rate screw again at its current meeting.
The Fed’s new economic forecast suggests that another interest rate hike could be on the horizon this year and that interest rates could also be higher next year than previously expected.
The Fed had raised the key interest rate eleven times since March 2022 in the fight against high inflation – most recently by 0.25 percentage points in July. The cycle is considered one of the fastest and sharpest tightening periods in the Fed’s history. Only in June did the monetary authorities take a break after ten hikes in a row. Analysts had expected another break in interest rates.
Slightly higher inflation expected in 2023
The Fed was driven by consumer prices that were far too high. The inflation rate rose to a good nine percent last year – and then slowly fell. According to the US government, consumer prices rose by 3.7 percent in August compared to the same month last year. Keeping inflation under control is the classic task of central banks. The Fed aims for price stability in the medium term with an inflation rate of 2 percent.
The US Federal Reserve has now published new estimates of the inflation rate. It expects the inflation rate to be slightly higher this year than previously assumed. The inflation rate is expected to average 3.3 percent (June: 3.2 percent). The Fed is forecasting 2.5 percent for next year. Core inflation, i.e. without taking food and energy prices into account, is expected to be 3.7 percent this year. The central bankers pay particular attention to this value in their analysis. According to experts, it reflects the general price trend better than the overall rate because components that are susceptible to fluctuation are excluded.
In the fight against high consumer prices, the Fed is increasing interest rates in order to slow down demand. If interest rates rise, private individuals and businesses have to spend more on loans – or borrow less money. Growth is slowing, companies cannot pass on higher prices indefinitely – and ideally the inflation rate is falling. At the same time, however, there is a risk of strangling the economy. Finding the right balance is the big challenge for central bankers.
Growth forecast significantly raised
The Fed is now predicting significantly higher economic growth this year than expected three months ago. The gross domestic product (GDP) of the world’s largest economy will therefore grow by 2.1 percent in 2023. That would be 1.1 percentage points more than forecast in June. The Fed is forecasting growth of 1.5 percent for the coming year.
Fed Chairman Jerome Powell has repeatedly made it clear that he will raise the key interest rate or leave it at a high level until inflation is under control. The Fed’s interest rate increases are unlikely to have had their full effect yet, as they only take effect with a time lag. The Fed’s decision-makers now expect an average key interest rate of 5.6 percent at the end of the year – as forecast in June. An average of 5.1 percent is expected for 2024 – in June it was 4.6 percent.