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Global Economy

The US Federal Reserve raises the key interest rate again significantly

In view of the rampant inflation in the USA, the Federal Reserve (Fed) is once again daring to take an unusually large interest rate hike. It raised the key interest rate by three-quarters of a percentage point.

Overall, it is the fourth rate hike this year and since the start of the coronavirus pandemic. In June, the Fed had already raised it by 0.75 percentage points – the largest rate hike since 1994, i.e. in almost 30 years.

With the renewed increase, a range of 2.25 to 2.50 percent has now been reached. According to Fed Chair Jerome Powell, the next rate hike could follow as early as September.

Inflation rate at 9.1 percent

Due to high inflation, the Fed is under pressure to raise the price of money as quickly as possible. Because of the sharp rise in the cost of food, rent and energy, many Americans have less in their wallets.

The inflation rate was last at 9.1 percent – the highest level since late 1981. However, some experts fear that the Fed could be too aggressive in fighting inflation and thus stall the economy.

Because increases in the key interest rate by the central bank make loans more expensive and slow down demand. This helps bring down the rate of inflation, but it also weakens economic growth.

This is also likely to result in a higher unemployment rate. At 3.6 percent, this is currently at a very low level in the USA: According to the Department of Labor, around 5.9 million people were unemployed in June. Before the outbreak of the corona pandemic in February 2020, there were 5.7 million.

Hope for recovery in July

However, the Fed's interest rate policy can only influence prices to a very limited extent. Disruptions in global supply chains and rising energy prices are not directly responding to US interest rates. The Fed cannot control the consequences of the Russian war of aggression in Ukraine and the corona lockdowns in China.

It is now at least expected that the US inflation data for July could send an initial positive signal. They will be published in August – the rate of inflation could then at least fall somewhat, as gasoline prices in the United States have recently fallen again.

The economy had already started to plummet at the beginning of the year. For the data for US gross domestic product in the second quarter due on Thursday, experts expect a relatively meager plus of 0.5 percent extrapolated for the year.

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