After a series of exceptionally sharp rate hikes, the US Federal Reserve (Fed) is slowing somewhat. On Wednesday, it raised the policy rate by half a percentage point – to a range of 4.25 to 4.50 percent. Earlier, the central bank increased monetary policy in four giant steps by 0.75 percentage point.
This had a clear effect: recently there have been increasing indications that high inflation is on the wane. Inflation in the US fell to an annual low of 7.1 percent in November. Fifth consecutive fall gives hope that US inflation has peaked. For the current year, the US Federal Reserve expects inflation to be only slightly higher than previously assumed. Inflation is expected to average 5.6 percent. This indicates that the momentum of the price increase is slowing down. The medium-term inflation rate desired by the Fed is two percent — and the new numbers are a long way from that.
The monetary watchdogs have now indicated that they will be less brutal when it comes to raising rates next year: they estimate that the policy rate will average 5.1 percent by the end of 2023. Many investors are betting that interest rates will peak within a few months. However, central bank chief Jerome Powell has repeatedly emphasized that the Fed must show perseverance in the fight against high inflation.
Mild economic growth in prospect
The central bank expects economic growth to be slightly higher this year than assumed three months ago. The gross domestic product (GDP) of the world’s largest economy is expected to grow by 0.5 percent, the Fed announced in Washington on Wednesday. That would be 0.3 percentage point more than predicted in September. For next year, however, the Fed lowers its forecast by 0.7 percentage point to an economic growth of only 0.5 percent.
Rising policy rates make loans more expensive, curbing demand. This helps lower inflation, but also weakens economic growth. The strict monetary policy of the Fed increases the risk that the bank will slow down the economy so much that the labor market and the economy come to a standstill. Recently, the Fed’s actions have been criticized. The accusation was that Fed Chairman Powell raised rates too much and could slide the US into recession.
Source: Krone
I’m Ben Stock, a journalist and author at Today Times Live. I specialize in economic news and have been working in the news industry for over five years. My experience spans from local journalism to international business reporting. In my career I’ve had the opportunity to interview some of the world’s leading economists and financial experts, giving me an insight into global trends that is unique among journalists.
