Monetary policy: US Federal Reserve advises on forthcoming rate hikes

monetary policy
The US Federal Reserve advises on upcoming rate hikes

In view of the high inflation rate and solid economic growth, the US Federal Reserve is advising on tightening its monetary policy.

After the Central Bank Council meeting, experts are expecting the Federal Reserve (Fed) to give a clear signal for an interest rate hike in March. It would be the first rate hike in the world’s largest economy since the pandemic began. The key interest rate is currently in the extremely low range of 0.0 to 0.25 percent.

The Fed has already initiated its turnaround away from the aid programs against the Corona crisis and towards a tighter monetary policy. Monthly security purchases of up to 120 billion US dollars (around 106 billion euros) to provide liquidity to financial markets and support the economy are to be phased out in March after a throttling.

Crisis programs are to be phased out

According to US Federal Reserve Chairman Jerome Powell, this would basically clear the way for an initial interest rate hike. In mid-January, Powell said that once the bond purchases were complete, it was time to “raise interest rates throughout the year.” The Fed’s balance sheet, which has been swollen as a result of the crisis programs, is then to be quickly reduced, which would further withdraw liquidity from the markets.

After the meeting of the Central Bank Council, whose decisions Powell explained to the press today, analysts are expecting a signal as to whether the first rate hike will come at the next meeting on March 16th. Many of them expect an increase of 0.25 percentage points. According to a December Fed forecast, up to three rate hikes are likely by the end of the year.

Positive labor market development

The Fed is committed to the goals of price stability and full employment. The labor market is developing very positively: the unemployment rate fell to 3.9 percent in December and many companies are already complaining about a lack of applicants. Before the Corona crisis, the unemployment rate was 3.5 percent, the lowest level in decades.

But inflation is troubling the Fed. Until the end of last year, the central bank still described the high inflation rate as a “temporary” phenomenon as a result of the Corona crisis. But prices have been rising for months, which is why the Fed is now tightening monetary policy more quickly. An increase in the key interest rate would curb inflation, but also slow down economic growth. Inflation rose to 7 percent in December compared to a year earlier. This is the highest value in decades.

Higher inflation weakens the purchasing power of consumers because they can buy less with a dollar than before. Among other things, experts blame the rapid economic recovery from the Corona crisis, generous economic stimulus programs and disruptions in global supply chains for the rise in prices.

Falling approval for Biden

Inflation is also a problem for President Joe Biden, with many voters blaming the government for it. Roughly speaking, the higher the prices, the more Biden’s poll numbers fall. This is causing problems for the President and his Democrats, who are trying to defend their slim majorities in both chambers of Parliament in the congressional elections in November.

Although many people in surveys express dissatisfaction with economic development, the US economy has been booming so far: on Thursday the government will announce the first estimate of gross domestic product (GDP) growth in 2021. Treasury Secretary Janet Yellen expects rapid growth of around 5.3 percent, while the Fed most recently expected growth of 5.5 percent.

dpa