Economic situation - US Federal Reserve leaves key interest rate unchanged again
The US Federal Reserve (Fed) has left its key interest rate unchanged at a high level for the third time in a row. It remains in the range of 5.25 to 5.5 percent, as announced by the Federal Reserve Board in Washington. This is the rate at which commercial banks can borrow central bank money. It is the highest rate in more than two decades.
The Fed's new economic forecast indicates that interest rates will be lowered again next year - and even more than previously forecast.
Since March 2022, the Fed has raised its key interest rate by more than five percentage points in the fight against high consumer prices. The rapid rise in inflation was triggered, among other things, by the increase in energy prices following the Russian attack on Ukraine. Although inflation is still higher than the Fed's target, it is weakening.
The US Department of Labor announced on Tuesday that inflation in the US continued to weaken slightly in November. Consumer prices rose by 3.1 percent compared to the same month last year. In October, the rate had been 3.2 percent.
Fight against inflation
Keeping inflation in check is the traditional task of central banks. The Fed is aiming for price stability in the medium term with an inflation rate of 2%. The US central bank has now published new estimates of the inflation rate. It expects a slightly lower inflation rate in the coming year than previously assumed. The inflation rate is expected to average 2.4% (September: 2.5%). For 2023, the Fed is forecasting an inflation rate of 2.8% (September: 3.3%).
Core inflation, i.e. excluding food and energy prices, is expected to be 3.2 percent this year and 2.4 percent next year. The central bankers pay particular attention to this figure in their analysis. According to experts, it reflects the general price trend better than the overall rate, as components that are prone to fluctuation are factored out.
It's all a question of balance
In the fight against high consumer prices, the Fed is turning the interest rate screw to slow down demand. If interest rates rise, private individuals and businesses have to spend more on loans - or borrow less money. Growth declines, companies cannot pass on higher prices indefinitely - and ideally the inflation rate falls. At the same time, however, there is a risk of stifling the economy. Finding the right balance is the big challenge for central bankers. Experts assume that Christmas sales could now provide an additional boost to the economy.
The Fed is now forecasting slightly lower economic growth for the coming year than was assumed three months ago. The gross domestic product (GDP) of the world's largest economy will therefore grow by 1.4% in 2024. This would be 0.1 percentage points less than forecast in September.
Fed Chairman Jerome Powell has repeatedly made it clear that the central bank should not declare victory in the fight against high inflation too early. After the last meeting at the beginning of November, he therefore said that the question of interest rate cuts did not currently arise. The Fed's decision-makers now expect an average key interest rate of 4.6 percent for the coming year (September: 5.1 percent).
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Source: www.stern.de
