Update: Fed with biggest interest rate hike since 1994 – lowers growth forecast – “neutral inflation rate in mid-2 percent range”

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As expected by some analyst firms (JP Morgan, Goldman Sachs, Citigroup), the US Federal Reserve has raised its key interest rate significantly. In particular, it raised the threshold by 75 basis points from 1.50 to 1.75 percent. This is the biggest interest rate move since 1994. And: The US monetary authorities are raising inflation forecasts while lowering growth forecasts.

This current rate hike is the third hike (editor’s note: the Fed already hiked it by 25 basis points in March and 50 basis points in May) in the key interest rate since the beginning of the corona pandemic and the same time in almost 30 years. The largest interest rate hike in The US Federal Reserve usually prefers to raise interest rates in 0.25 percentage point increments.

Due to the latest data on persistently high inflation rates, some analysts had forecast in the past few days that the Fed could surprise the markets with a rise of 0.75 percentage points. An increase of three quarters of a point was priced in on the financial markets.

The Fed is likely to raise its key interest rates much more than previously planned. According to new estimates, the key interest rate should be around 3.4 percent by the end of 2022. Previously, that estimate was 1.9 percent. A policy rate of 3.8 percent is expected at the end of 2023, after a forecast of 2.8 percent. At the end of 2024, the key interest rate is expected to be around 3.4 percent. This expectation is also much higher than the previous one.

The Fed is also forecasting significantly lower economic growth for this year than three months ago. US GDP is expected to grow 1.7 percent — 1.1 percentage points lower than forecast in March. The Fed is also expecting a higher inflation rate this year than before. Despite the planned increase in 2022, this inflation rate should average 5.2 percent. According to Fed Chair Jerome Powell, “the long-term neutral interest rate is in the middle of the 2 percent range.”

The Fed’s dilemma: Inflation (8.6 percent in May) is the highest in almost four decades and is eroding consumer spending power. The Fed is raising interest rates to curb inflation. This makes loans more expensive, which slows down demand. This helps to lower the inflation rate, but at the same time weakens economic growth.

(with material from dpa-afx)

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