Central banks: The US Federal Reserve is dampening expectations of rapid interest rate cuts

The US Federal Reserve is not yet ready to cut interest rates.

Central banks: The US Federal Reserve is dampening expectations of rapid interest rate cuts

The US Federal Reserve is not yet ready to cut interest rates. The Federal Reserve on Wednesday left interest rates unchanged at their highest level in more than two decades in a range of 5.25 to 5.5 percent. “Inflation is still too high and further progress in reducing it is not assured,” said Fed Chairman Jerome Powell. Interest rate cuts probably cannot be expected at the next meeting in March either. Nevertheless, the Fed chief made it clear that current interest rates have "probably reached their peak" and rate cuts are expected this year.

Since March 2022, the Fed has raised its key interest rate by more than five percentage points at a record-breaking pace in the fight against inflation - but has recently stopped adjusting the interest rate screw. The rapid inflation was triggered, among other things, by the rise in energy prices after the Russian attack on Ukraine. Central banks are turning interest rates in the fight against high consumer prices. If interest rates rise, private individuals and businesses have to spend more on loans - or borrow less money. Growth is slowing, companies cannot pass on higher prices indefinitely - and ideally the inflation rate is falling.

The US economy grew more strongly than expected

It is important for the Fed to find the right balance. Because if interest rates are too high, there is a risk of a recession. As expected, the Fed's rapid interest rate hikes had dampened growth in the largest economy. But recent economic data has positively surprised economists - and probably central bankers too. Last fall, the US economy grew more strongly than expected. The good economic data is reducing the pressure on the Fed to significantly reduce interest rates quickly, even though inflation has now fallen. Powell sought to keep all options open on Wednesday.

“US consumers are feeling more optimistic again in view of a robust labor market,” explained Friedrich Heinemann, economist at the ZEW economic research institute. The US economy survived the aggressive interest rate hike without a so-called hard landing. That is the reason why the Fed is now in no hurry to make its first interest rate cuts, said Heinemann. "The economy is also coping with the current interest rate level and inflation even rose again in December. This is not a constellation for rapid and sharp interest rate cuts."

Inflation in prices in the USA unexpectedly accelerated significantly in December. Consumer prices rose by 3.4 percent compared to the same month last year. In November the rate was 3.1 percent. The US Federal Reserve is aiming for price stability of 2 percent in the medium term. Keeping inflation under control is the classic task of central banks. The inflation rate in the USA was always more than 9 percent in the summer of 2022, the highest it has been in around four decades.

“We will depend on the data”

Fed Chairman Powell repeatedly urges caution and has now said again that victory in the fight against inflation cannot yet be declared. "If inflation were to rise unexpectedly again, we would have to react to it." He did not rule out leaving interest rates at a high level for longer. You don't want to rush anything. “We will be dependent on the data,” Powell said. Regarding a possible rate cut at the end of March, he said: "I don't think that's the most likely case." In December, Fed decision-makers expected an average key interest rate of 4.6 percent for this year. That suggests about three rate cuts in 2024.

Inflation in the USA is primarily driven by strong demand and a strong labor market. A strong labor market generally makes it harder for the Fed to fight inflation because it drives up wages. The problem is that the demand for workers still exceeds the supply of available workers, says Powell.

The prospect of key interest rates remaining high for the time being worried market participants on the US stock exchanges on Wednesday. The most famous Wall Street index, the Dow Jones Industrial, which had risen to a record just under 38,600 points at the start of trading, closed weakly. The S