The FED raises the key interest rate again by 0.75 percentage points. Markets reacting positively

11/2/2022, 06:23 PM
The FED raises the key interest rate again by 0.75 percentage points. Markets reacting positively
The high inflation in America, like in Europe, has caused the US Federal Reserve to raise interest rates sharply. On Wednesday, the central bank increased the benchmark interest rate by three-quarters of a percentage point to a new range of 3.75 to 4.00 percent. This was in line with expectations from financial markets, as Fed chair Jerome Powell and his colleagues are under pressure to combat inflation, which reached 8.2 percent last month.

Looking ahead, experts will be closely watching Powell's press conference for clues about the Fed's future monetary policy. Some economists believe that the Fed's rate hikes will choke off economic growth and lead to a recession. However, gross domestic product actually grew in the summer despite high inflation and rising interest rates. The housing market is cooling down, but the labor market remains strong.

The Fed's actions have global implications, as the central bank sets the tone for other major central banks. If the Fed raises rates further, it is likely that other central banks will follow suit. In Europe, the European Central Bank (ECB) has recently started to raise rates in an effort to combat inflation. Interest rates in the eurozone are rising at a historically fast pace, with each ECB meeting resulting in an increase of 0.75 percentage points.

While central banks can indirectly influence inflation through monetary policy, the effect is relatively small. Higher interest rates make loans more expensive, which theoretically reduces consumption. This, in turn, decreases demand for goods and makes it harder for companies to raise prices, leading to lower inflation rates.

At the same time, the influence of monetary policy on inflation is considered relatively small in the current energy crisis. The reason is that it is not an excess of money in circulation that is driving up prices, but rather the scarcity of energy resources such as gas.

As a result, economists believe that the efforts of central banks will only have a very delayed effect on inflation. Leading research institutes expect very high inflation rates in both the USA and the eurozone next year. The ECB's target of an inflation rate around two percent is not expected to be reached until 2024 at the earliest.