Federal Reserve doubled the key rate
It will likely mean exactly nothing to tame the inflation
The US central bank, the Fed, has raised interest rates as expected. In the fight against high inflation, the base rate has been raised from zero to 0.25 to 0.5 percent. The Fed is expected to raise interest rates further in small steps in the coming months. The last time the Fed raised interest rates was in 2018.
At the outbreak of the corona pandemic in March 2020, the Fed cut interest rates to zero percent in two steps and launched a large-scale support program to save the economy from collapse. Meanwhile, the US economy is showing a strong recovery from the crisis and is struggling with a sharp rise in inflation. This is the highest inflation in more than forty years, partly due to rising energy prices.
“Inflation remains well above our long-term target of 2 percent,” Powell said. “The rise in prices of crude oil and other commodities as a result of the Russian invasion of Ukraine will put additional upward pressure on short-term inflation here with us.”
Powell expects the interest rate to average 1.9 percent at the end of this year and reach 2.8 percent in 2023. That is a lot higher than previously stated. Powell: “these expectations do not represent a decision or plan by the Fed, and no one knows with any certainty exactly where the economy will be in a year.”
Unlike the Fed, the European Central Bank (ECB) has so far not wanted to raise interest rates, despite also sky-high inflation. According to the ECB, the European high inflation is largely due to the excessively high oil and gas prices, combined with the war in Ukraine,. Inflation is expected to fall again in the course of this year or next. In addition, Europe must import most of its energy, while the US itself produces a lot of oil and gas.
Another measure of interest rates is the labor market and wage developments. In the US, the tight labor market and inflation are driving up wages and creating a wage-price spiral, something that is not yet really the case in Europe.
The US, by the way, uses a bandwidth of a quarter of a percent in the base rate. The interest rate is now at 0.25 to 0.5 percent. This has to do with the economic differences in the regions and states, so that one region benefits more from higher interest rates than the other. As a result, regions can better align interest rates.
The ECB’s base rate, on the other hand, is just a percentage, although the eurozone is also made up of different economies with economically and financially strong(re) and weak(re) countries, which would also benefit from different interest rates.