US interest rates hit 16-year high

  • By Natalie Sherman
  • Business Correspondent, New York

image source, Good pictures

The US Federal Reserve has raised interest rates to a 16-year low.

The Federal Reserve increased its key interest rate by 0.25 percentage points – its 10th hike in 14 months.

It raised its key rate from near zero to 5% and 5.25% in March 2022, although the central bank has indicated that this hike may be the last for now.

The European Central Bank has also raised rates again, albeit by a smaller amount than in previous months.

The ECB raised its three key interest rates by 0.25 percentage points, whereas the previous three meetings had all seen big hikes.

‘significant change’

In the US, high rates have sharply raised the cost of borrowing, fueled a slowdown in sectors such as housing and played a role in the recent failures of three US banks.

We are no longer saying we expect an additional interest rate hike, a “significant change,” Federal Reserve Chairman Jerome Powell said after the announcement.

However, he refused to rule out the next move: “We will be driven by incoming data.”

image source, Good pictures

image caption,

Federal Reserve Chairman Jerome Powell hinted that this could be the last rate hike for a while

Last year, when prices in the U.S. were rising at their fastest pace in decades, the Fed began aggressively raising interest rates.

Since the Fed began its campaign, inflation in the US has shown signs of moderation.

In March, inflation, the rate at which prices rise, was 5% — the lowest in nearly two years — still uncomfortably high for the central bank’s 2% rate target.

Gregory Daco, chief economist at EY-Parthenon, said he thought the central bank would be “prudent” to pause now, given the growing risks to the economy of slowing activity.

Fears of recession in the economy are high today. “I don’t think the inflation war is over, but we’re in a situation where we’re going to see gradual inflation, and we’re in an environment where interest rates are going to be higher and higher, so we have to rein in business activity. That’s going to lead to more inflation in the coming months.”

At the New York-based family-owned milk chain, President Bill Taubner says customers have become more cautious in recent months because of economic concerns. His company has also reduced its inventory in response to rising prices.

But he remained optimistic that his company was not facing immediate borrowing needs and that any slowdown would be mild and relatively short-lived.

image caption,

Bill Taubner felt the economy was cooling as customers of his manufacturing business grew more cautious.

“We feel there is some softness in the market because of inflation and obviously interest rate issues,” he said. “But long-term, we’re very positive.”

But he noted that the U.S. is confident of avoiding a recession, that hiring is strong and unemployment is low.

“I keep thinking it’s possible… this time is really different,” he said.

The central bank’s decision to raise rates on Wednesday was unanimous and widely expected by financial markets, which were looking for clues as to what the bank might do next.

In a written statement, the bank retracted its previous guidance in March that “some additional policy stabilization may be appropriate” to bring inflation under control.

At a press conference, Mr Powell said the bank was “getting close or maybe even there” to pausing its rate hike campaign, but said it was prepared to do more if warranted.

Whitney Watson, global co-head of fixed income and liquidity solutions at Goldman Sachs Asset Management, said the Fed could still raise rates depending on what happens in the coming months.

“Inflation is in the right direction, but progress is flat,” he said. “A pause in rate actions is appropriate, but further tightening is plausible if inflation remains sticky.”

‘too much time’

In Europe, the European Central Bank has also been raising rates to slow the pace of price rises in countries that use the euro.

Earlier this week, figures showed eurozone inflation rose 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%.

However, unlike the US Fed on Thursday, the ECB did not indicate that it might be done with rate hikes for now.

ECB President Christine Lagarde said the inflation outlook “remains too high for too long”.

Additional reporting by North American Business Correspondent Michael Fleury.

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