The Federal Reserve has raised interest rates by 75 basis points as expected. It is the largest rate hike since the early 1980s.
The US central bank, the Federal Reserve, wants to do everything it can to fight inflation. As expected, she raised key interest rates by 75 basis points to a range of 3-3.25%. Some analysts had expected even more, an increase of 100 basis points or one percentage point.
The cause of the sharp increase is not far fetched: the persistently high inflation. In August, inflation in the US was still 8.3 percent. The Fed’s main concern is rising core inflation. That is inflation that is not caused by rising energy or food prices. In August it was 6.3 percent. In contrast to Europe, the inflation surge is much more caused by an overheated economy combined with a very tight labor market. The US has been little affected by the war in Ukraine and rising gas prices, thanks to the presence of abundant amounts of shale gas. On the other hand, there is a very tight labor market. The unemployment rate is 3.7 percent, making it easy for workers to demand and receive higher wages, fueling inflation. The Fed hopes that a cooling economy will dampen workers’ wage demands.
It had been clear for some time that within the US Interest Rate Committee, the hawks would beat the pigeons (those who like to keep interest rates low). Just about all major governors want to prevent the US from entering a wage-price spiral. Fed Chair Jerome Powell made it clear at the informal central bank summit in Jackson Hole last month that he was serious about tackling the inflation problem. He is willing to pay the price of a slight economic recession. Powell wants to follow in the footsteps of Paul Volcker, the Fed chairman who used drastic means in the early 1980s to combat the persistent inflation of the late 1970s and early 1980s.
• Powell wants to put the brakes on the US economy
Economists therefore assume that the Federal Reserve will not stop there. They expect the Fed to raise interest rates to about 4.5 percent in the coming months and to leave them at that level for a while.