US Federal Reserve initiates monetary policy turnaround

As of: 01/26/2022 9:36 p.m

The US Federal Reserve has signaled an imminent increase in key interest rates. This is how the monetary politicians are reacting to the high inflation. The first rate hike is expected in March.

The US Federal Reserve (Fed) has signaled a rapid rate hike. In view of the high inflation rate and the good situation on the labor market, it will “soon be appropriate” to raise the key interest rate, the central bank said. Market experts interpret this as a clear signal that the key interest rate will be increased at the next meeting on March 16th.

For the time being, the central bank left the key monetary policy rate in the range of 0.00 to 0.25 percent. The Fed had lowered the key interest rate to this level in March 2020 in order to cushion the economic consequences of the pandemic.

The central bank is now forced to act, especially in view of the high inflation. Consumer prices in the US rose 7.0 percent in December, the highest in almost 40 years.

At the same time, central bankers signaled that the large bond-buying program introduced during the pandemic should continue to be rapidly phased out by $30 billion a month. This would complete this maneuver, known as tapering, in early March.

US markets react nervously

In New York, the stock markets initially expanded their gains, but then slipped into the red. Experts criticized the vague statements made by central bank chief Jerome Powell in the press conference following the decision. Up to four tightenings by a total of one percentage point are expected on the markets in the current year. However, Powell did not want to make any concrete statements on this.

ECB is still silent

Despite high inflation rates, there is still no interest rate turnaround in sight in the euro zone. The monetary politicians at the European Central Bank (ECB) have emphasized several times in recent weeks that the high inflation is due to temporary effects that are likely to subside over the course of the year.

Despite the interest rate path that has now been taken, savers should not expect too much for the coming years. Interest rates will remain low for the foreseeable future even if inflationary pressures persist. With interest rate increases, monetary policy is entering highly sensitive territory. The high indebtedness of the states and private households, which worsened considerably during the Corona crisis, does not allow for excessive interest rate increases. Most recently, the IMF had warned of the dangerous consequences of rising interest rates, especially for the emerging countries.

Reference-www.tagesschau.de

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