ZFor the second time in just six weeks, the Federal Reserve has made an unusually large interest rate hike: the American central bank announced on Wednesday that it would raise the key interest rate by another 0.75 percentage points to a range between 2.25 and 2.5 percent. Only in June was there an increase of 0.75 points, which was the largest rate hike in almost 30 years. The Fed has hiked interest rates four times this year.
Fed Chairman Jerome Powell made it clear in a press conference that he still sees no end to the tightening of monetary policy. He said he expects further increases will be “appropriate”. Even another “unusually large hike” at the next Fed meeting in September could be “appropriate”. However, a decision has not yet been made, and Powell did not want to make a specific forecast. The central bank wants to make its further course dependent on the economic data coming up until the next meeting.
Inflation at 9.1 percent
However, Powell also indicated that he would like to slow down the rate of increases in the future. That seemed to go down well on the financial markets. Immediately after the announcement of the interest rate hike, the American share indices were still slightly up, but during Powell’s press conference things went up more clearly.
With another sharp increase in interest rates, the central bank is continuing to try to get the high inflation under control. In June, the US inflation rate was 9.1 percent, the highest in more than 40 years. Powell said that figure was “even worse than expected” and that inflation is “way too high” at the moment. The central bank has “the tools and the determination” to bring inflation back to a lower level. The target is 2 percent. Powell admitted he was surprised by the dramatic rise in inflation rates and said there could be more surprises to come.
Interest rate decisions are a balancing act. The central bank wants to keep inflation down, but also wants to avoid the economy falling into recession. Powell said slowing economic growth is necessary to get inflation under control. However, the Fed does not want a recession, but a “soft landing” for the economy. However, the “path” for such a soft landing has become “narrower”.
Recession concerns are growing
Powell said some economic indicators are already pointing to an economic slowdown. However, the US economy is not yet in a recession. Many economic segments are still doing too well for that, and the job market remains very tight.
The head of the Fed called the new range of 2.25 to 2.5 percent for interest rates “neutral”, which means he sees interest rates in a range where they neither help nor harm the economy. With a view to possible further interest rate hikes, he described it as sensible to get to a “moderately restrictive level” by the end of the year. According to the latest estimates, this is between 3.0 and 3.5 percent.
Worries about a recession in the US are growing. Also contributing this week was America’s largest retailer Walmart, which cut its profit target for the second time in two months amid sluggish business. “When the world’s largest retailer issues a profit warning, it highlights the economic situation and consumer confidence – both in the USA and worldwide,” said Marko Behring, Head of Asset Management at Fürst Fugger Privatbank.
Only on Tuesday of this week did the International Monetary Fund (IMF) raise its forecast for inflation rates this year in its most recent economic outlook. He described the inflation as “stubborn”. He also painted a bleak picture for economic development, both in the US and in the rest of the world. For the United States, he only expects economic growth of 2.3 percent this year, compared to 3.7 percent in April. Next year it should even be just 1.0 instead of 2.3 percent.
