The US Federal Reserve has announced an increase in its key interest rate by 0.25 percentage points, marking its tenth hike in 14 months. The new benchmark rate is between 5% and 5.25%, up from its previous near-zero level in March 2022. This decision may be the last one for now, according to the Fed’s latest hints.
The European Central Bank (ECB) has also raised its rates by 0.25 percentage points, but the increase is smaller than in previous months. However, unlike the Fed, the ECB did not suggest that it had completed rate rises. ECB President Christine Lagarde said the inflation outlook “continues to be too high for too long”.
The Fed’s move has caused borrowing costs to increase, which has led to a slowdown in sectors such as housing and has played a role in the recent failures of three US banks. This change is a significant one, and the Fed has not hinted that there will be further increases.
However, the bank remains open to the possibility, depending on incoming data. The bank’s decision to raise rates was unanimous and widely expected by financial markets, which are looking for clues as to what the bank may do next.
Higher interest rates make it more expensive to buy a home, borrow to expand a business or take on other debt. Officials expect that by increasing these costs, demand will fall, and prices will cool off. Since the Fed started its campaign, price increases in the US have shown signs of moderating. In March, inflation stood at 5%, which is the lowest level in nearly two years, though still uncomfortably high for the Fed, which is targeting a 2% rate.
According to Gregory Daco, the chief economist at EY-Parthenon, the Fed would be “prudent” to pause now, as the risks to the economy as activity slows are growing. However, he believes that the fear of a recession is present in the economy, but he is hopeful that any slowdown would be mild and relatively short-lived.
Bill Taubner, the president of Ball Chain Manufacturing, a family-owned firm in New York, says that customers have become more cautious in recent months due to economic worries. His company has also cut back on replenishing its supplies in response to still-rising prices. However, he believes that his firm does not face imminent borrowing needs, and he remains hopeful that any slowdown would be mild and relatively short-lived.
In Europe, the ECB is also raising rates to try to slow the pace of price increases in the countries that use the euro. Earlier this week, figures showed that eurozone inflation increased in April for the first time in six months. Prices rose at an annual pace of 7%, well above the ECB’s target of 2%. On Thursday, the ECB raised its key deposit rate to 3.25% from 3%. It also lifted its main refinancing rate to 3.75% from 3.5%.
The Fed’s decision to raise rates is significant, and while it has caused a slowdown in some sectors, officials expect that it will help cool off prices. The decision to pause is a prudent one as the economy slows, but the Fed remains open to further action if necessary. Meanwhile, the ECB continues to raise its rates to try to slow the pace of inflation in the countries that use the euro.