May 20, 2022

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Significant interest rate hike in US against high inflation - FM.nl

Significant interest rate hike in US against high inflation – FM.nl

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The second tariff increase was twice as large as in March.

The Federal Reserve has raised its key interest rate by 0.5 percent. This is the largest interest rate hike since 2000. Through this move, the US umbrella system of central banks hopes to curb the sharp rise in inflation. Prices in the United States rose in March to levels not seen in the last 40 years.

This is the central bank’s second rate hike in the short term, but much larger than the 0.25 percentage point in March. Further rate hikes are expected to come, which would be “appropriate” in the words of central bankers. Federal Reserve Chairman Jerome Powell told reporters that at the next interest rate meeting, half a percent interest rates will be back on the table. Further significant increases, for example 0.75 percentage points, are not possible.

Powell began his press conference by saying that inflation was “very high.” To prevent this, the central bank umbrella reduces its balance sheet, which is full of purchased securities. It basically flows less money into the economy because the income from those loans is not reinvested.

Like other central banks, the central bank launched a massive push at the start of the Corona crisis to keep the US economy and financial markets afloat. Interest rates have plummeted to an all-time low and the central bank has bought tens of billions of dollars in bonds every month to pay off the economy.
After the unexpected rapid recovery of the economy last year, inflation had already begun to rise, after which the central bank decided to gradually stop buying bonds.

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The war between Ukraine and Russia, two major powers for raw materials such as gas, oil and grain, has led to even more price hikes. According to the central bank, locks in China threaten to escalate logistics disruption, which could lead to further price increases.

One challenge is not to cause a recession by putting the brakes too hard on rising interest rates, experts say. Powell said there was a “credible path” to avoid an economic contraction. He later said that the central bank’s main objective was to keep prices stable. “Without price stability, the economy will not work for anyone.”

(ANP)

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