The US Federal Reserve continues its monetary policy change. The Fed raises its key interest rates by 0.5 percentage points, twice as much as the first rate hike in March, to a current range between 0.75 and 1.0 per cent. In addition, the central bank has announced that it will start reducing its balance sheet in June. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, has commented on this matter:

ZEW economist Friedrich Heinemann comments on the Fed's decision to leave its key interest rates unchanged.
Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance” at ZEW, comments on the Fed’s interest rate decision and the US economy.

“The Fed is increasing its pace in the face of very high and broad inflation dynamics. But this is only the beginning. We will see several consecutive rate hikes in the coming months. The highly inflationary US economy with its strong wage dynamics now needs a credible strategy to combat inflation. Also, unlike the ECB, the Fed does not have to worry about an energy crisis, as the US is largely self-sufficient in terms of energy. So far, expectations for US key interest rates at the end of the year are just under three per cent. It is increasingly likely that it will not stop there and that the Fed will have to act even faster to slow down the wage-price spiral that is underway.”

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The US Federal Reserve has initiated the interest rate turnaround. After two years of being anchored in a range between 0 and 0.25 per cent, key interest rates have now been raised by 0.25 per cent. Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, has commented on this matter:

“This first small rate hike was more than overdue and seems half-hearted. The US inflation rate is approaching the ten per cent mark at great speed and inflation expectations are rising sharply. The central bank must now prevent a temporary pandemic- and war-related inflation from turning into a longer-term inflationary process. To this end, significantly higher interest rates are inevitable. The recent very strong data from the US labour market again indicate that the US economy can also cope with a global slowdown caused by the Ukraine war. Against this backdrop, the first feeble hike of 25 basis points has proved too timid. With its hesitancy, the Fed is only running behind the inflation curve.”

The US Federal Reserve will already complete the exit from its asset purchases at the beginning of March. For the time being, key interest rates will remain in a range between 0 and 0.25 per cent. At the same time, however, it is now holding out the prospect of an interest rate hike in the near future. Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, has commented on this matter:

“This is perhaps the most difficult situation the Fed has faced since the 1970s. The high number of voluntary quits by workers shows that the US labour market is heading towards both full employment and continued wage increases in competition for labour.

The argument that the current rise in inflation is only temporary is no longer supported by US economists. It is not enough to just raise interest rates a few times, as the real interest rate is currently very negative due to the high inflation rate. In fact, the Fed is still going full throttle, even though it should have slowed down long ago.

Of course, there is the fear of a hard landing with a stock crash and a global financial crisis. This fear must not paralyse the Fed. Because once inflation expectations rise permanently, everything becomes even more difficult.”

Date

04.05.2022

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