The ECB is also likely to continue its fight against inflation at a reduced pace at its interest rate meeting this Thursday. After two rate hikes of 0.75 percentage points each, most bank economists expect tightening by 0.5 points. The hikes have been in place since the summer – albeit after a lengthy phase in which the monetary watchdogs had only hoped for a temporary surge in inflation and had been hesitant about raising interest rates. In November, inflation in the currency area of the 19 euro countries was 10 percent. Inflation in the euro area peaked at 10.6 percent in October.
In the US, the new inflation data from the Department of Labor for November was rather optimistic. They showed the fifth decline in the inflation rate in a row. Long-term estimates of consumer prices, however, show that long-term inflation is still a long way from the 2 percent that the Fed wants. The central bank estimates that inflation will average 5.6 percent this year. This indicates that the dynamics of the price increase are slowing down. But for 2023, the Fed forecasts an average inflation rate of 3.1 percent, for 2024 it will still be 2.5 percent.
“We continue to believe that further increases are appropriate,” Powell said. At the moment, there are simply not enough signs to be sure that inflation is falling on a sustained basis – quite the contrary. The Fed also anticipates a sharp slowdown in economic growth. It is now predicting significantly lower growth for the coming year than was assumed just three months ago. The gross domestic product (GDP) of the world’s largest economy will only grow by 0.5 percent in 2023. “I don’t think anyone knows if there will be a recession or not,” said the Fed chairman. And if there is one, there is no telling how intense it will be.
The Fed also expects unemployment to rise significantly. That suggests that the rigor monetary policy will come at a high price for the economy as a whole. The interest rate hikes are helping to lower inflation, but they are also slowing down economic growth. With the Fed’s tight monetary policy, there is a growing risk that the bank will slow down the economy so severely that the job market and economy are stalled. This is one of the reasons why the Fed is now likely to opt for more moderate rate hikes.
Most recently, the Fed had raised the key interest rate by an impressive 0.75 percentage points four times in a row – it is now the seventh increase this year. Fed Chairman Powell had already indicated in November that the unusually large jump of 0.75 percentage points could at least be over. The Fed’s next decision will be in February. “At a certain point, how long do we remain restrictive becomes the most important question,” Powell said. “But I would say the most important issue is no longer speed.”
It is clear, however, that cuts in the key interest rate in the USA are not pending. The question now will be how long interest rates will have to remain high before consumer prices start to fall permanently. “We’ve come a long way and the full impact of our rapid streamlining is yet to be felt,” said Powell.
A turbulent year lies behind the US Federal Reserve. The drastic measures are the result of inflation, which at times was higher than it had been in decades. The Fed has struggled to keep pace with rising consumer prices and has been taking interest rate hikes at an unusual pace. At first there seemed to be no success. This is also due to the fact that the Fed’s interest rate decisions only take effect with a delay. And so the full force of the unusually large rate hikes could only be felt in the coming year.
Also the euro zone is facing an economically difficult winter, to which the ECB is likely to react with a slightly less strict monetary policy. The high – and since the outbreak of the war reduced – dependency on Russian energy supplies has hit the economic area unprepared and hard. In addition, there are ongoing problems in world trade, although there is some light at the end of the tunnel.
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WASHINGTON (dpa-AFX)
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