The US Federal Reserve raises interest rates by 0.25 percentage points

The US Federal Reserve has raised interest rates by 0.25 percentage points to combat inflation. It is now in the range of 4.5 to 4.75 percent, as the Federal Reserve announced on Wednesday. With its first interest rate decision of the year, the central bank is further slowing down its rate hikes.

In December, the Fed only raised the key interest rate by half a point. Previously, it had boosted it by 0.75 percentage points four times in a row to break the wave of inflation.

The Fed had acted particularly aggressively against the high rate of inflation in the past few months and had increased interest rates at a rapid pace. The drastic measures are the result of inflation, which at times was higher than it had been in decades. The rate of inflation in the USA had recently fallen further – a sign of the first successes of the strict monetary policy.

In December, consumer prices rose by 6.5 percent compared to the same month last year. In November, the rate was 7.1 percent. It was the sixth decline in the inflation rate in a row – but it is still high.

Fed Chairman Jerome Powell had already made it clear in December: “We will stay the course until the job is done.” In December, the Fed predicted that it would hike rates to just over 5 percent this year. In its most recent economic forecast, the International Monetary Fund (IMF) also stressed that the central banks should not let up despite initial successes in their fight against high consumer prices. The battle is not yet won.

Keeping inflation in check is the traditional task of central banks. In the medium term, the Fed is aiming for an average inflation rate of around two percent. If interest rates rise, private individuals and businesses have to spend more money on loans – or they borrow less money. Growth is slowing, companies cannot simply pass on higher prices, and ideally inflation is falling. With such a tight monetary policy, however, the risk also increases that the central bank slows down the economy so much that it stalls. However, the US economy had grown surprisingly strongly at the end of last year, which has reduced concerns about a possible recession.

The European Central Bank (ECB) is also about to raise interest rates again. The Governing Council of the ECB is expected to raise the key interest rate in the euro area again at its meeting this Thursday.