The key interest rate is currently in the extremely low range of 0.0 to 0.25 percent.
(Photo: AP)
Washington Despite the unforeseeable consequences of the Ukraine war, the US Federal Reserve will in all likelihood initiate the interest rate turnaround this month. “We expect it will be appropriate to raise the target range for the federal funds rate at our meeting this month,” Fed Chair Jerome Powell said at a congressional hearing on Wednesday. However, the war in Ukraine makes the outlook appear highly uncertain. In view of an inflation rate of 7.5 percent recently, the Fed is under pressure to tighten its course and thus brace itself against the upward trend in prices.
However, Powell gave no indication of how quickly he thinks the Fed should move forward. After the Russian invasion of Ukraine interest rate fantasies on the financial markets had receded. While an unusually large step up of half a percentage point was initially expected, speculation is now merely that it will rise by a quarter of a point in March. Further rate hikes are likely to follow in the course of the year. The key interest rate is currently still in a corridor of zero to 0.25 percent.
According to LBBW economist Elmar Völker, the signs are now clearly pointing to an interest rate hike: “Today’s statements by the top US monetary authority were awaited with particular excitement because they were Powell’s first public statements on monetary policy since Russia invaded Ukraine.”
Speculations that the US Federal Reserve could shy away from the already clearly announced interest rate turnaround on March 16 in view of the resulting uncertainty seemed unfounded as things currently stand. “While there can be no certainties in the current extreme environment, the US Federal Reserve is too concerned with the overheating of US inflation to refrain from sending a clear signal to contain it.”
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Otherwise, the Fed would run the risk of falling so far behind in fighting inflation that it would later have to shock the economy with an outright interest rate shock in order to rein in inflation. As a result, a recession would be almost inevitable, explained the economist. The impact of the coronavirus pandemic on the US economy is easing, according to Powell.
Inflation, on the other hand, has become a major risk. It is highly uncertain what the short-term consequences of the Russian invasion, the ongoing war, sanctions and events to come will be for the US economy. It must be recognized that the economy is developing in an unexpected way. “We need to respond quickly to incoming data and the evolving outlook,” he said.
According to US currency watchdog Loretta Mester, the situation in Ukraine could further drive up inflation and depress economic growth. Your colleague Charles Evans from Chicago already thinks the price hike is “extreme”. It represents quite a risk: “Monetary policy must address this. That’s for sure,” he added.
More: Central bank expert Adam Posen: “The Fed has lost its bet”