Economy: US Federal Reserve leaves key interest rate unchanged again

The US Federal Reserve (Fed) is leaving its key interest rate unchanged at a high level for the third time in a row.

Economy: US Federal Reserve leaves key interest rate unchanged again

The US Federal Reserve (Fed) is leaving its key interest rate unchanged at a high level for the third time in a row. It remains in the range of 5.25 to 5.5 percent, as the Central Bank Council in Washington announced. Commercial banks can borrow central bank money at this rate. It is the highest value in more than two decades.

The Fed's new economic forecast suggests that interest rates will be cut again next year - and even more sharply than previously forecast.

Since March 2022, the Fed has raised its key interest rate by more than five percentage points in the fight against high consumer prices. The rapid inflation was triggered, among other things, by the rise in energy prices after the Russian attack on Ukraine. Although inflation remains higher than the Fed's target, it is weakening.

The US Department of Labor announced on Tuesday that price inflation in the US continued to weaken slightly in November. Consumer prices rose by 3.1 percent compared to the same month last year. In October the rate was 3.2 percent.

Fight against inflation

Keeping inflation under control is the classic task of central banks. The Fed aims for price stability in the medium term with an inflation rate of 2 percent. The US Federal Reserve has now published new estimates of the inflation rate. It expects inflation to be slightly lower next year than previously assumed. The inflation rate is expected to average 2.4 percent (September: 2.5). For 2023, the Fed expects an inflation rate of 2.8 percent (September: 3.3).

Core inflation, i.e. without taking food and energy prices into account, is expected to be 3.2 percent this year and 2.4 percent next year. The central bankers pay particular attention to this value in their analysis. According to experts, it reflects the general price trend better than the overall rate because components that are susceptible to fluctuation are excluded.

It's all a question of balance

In the fight against high consumer prices, the Fed is increasing interest rates in order to slow down demand. 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. At the same time, however, there is a risk of strangling the economy. Finding the right balance is the big challenge for central bankers. Experts assume that the Christmas business could now give the economy an additional boost.

The Fed is now predicting slightly lower economic growth for next year than expected three months ago. The gross domestic product (GDP) of the world's largest economy will therefore grow by 1.4 percent in 2024. That would be 0.1 percentage points less than forecast in September.

Fed Chairman Jerome Powell has repeatedly made it clear that the central bank must not declare victory in the fight against high inflation too early. After the last meeting at the beginning of November, he said that the question of interest rate cuts does not currently arise. The Fed's decision-makers now expect an average key interest rate of 4.6 percent for next year (September: 5.1 percent).

NEXT NEWS