The US central bank raises the key interest rate by 0.25 percentage points – E24

The US central bank, the Federal Reserve (Fed), raises the key interest rate once again. Chief economist believes this could be the last increase for this time.

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The US central bank sets the key interest rate in the US by 0.25 percentage points.

The new interest rate level in the world’s largest economy is now in the range of 5-5.25 per cent.

Today’s interest rate increase is the tenth in a row, and comes after the previous rate increase in March of 0.25 percentage points.

The central bank has raised interest rates in large, frequent jumps in an attempt to rein in skyrocketing price growth. This should happen by higher interest rates dampening activity in the economy, and in the next phase dampening price pressure.

– Could be the last rate hike

– This could be the last rate hike for this time. The Fed particularly highlights the uncertainty surrounding the effect of the banking crisis, and that they will monitor the overall effect of the interest rate increases, says Elisabet Holvik, chief economist at Sparebank 1, after the interest rate decision.

Holvik believes that the labor market reports in particular will be important to follow in the future.

– I perceive them as very insecure, she continues.

The interest rate committee repeats from earlier that they will carefully monitor incoming information and assess the implications for monetary policy.

At the same time, they have dropped the phrase “some further tightening may be appropriate” from previous press releases. Several American media, including the Wall Street Journal, interpret this as a possible pause in interest rate hikes.

They also emphasize once again that the banking system is “strong and resilient”.

No decision on a pause in interest rate increases

Central bank governor Jerome Powell says at the press conference following the decision that there is still a long way to go before inflation is down to two percent.

The central bank will determine the pace of future monetary policy decisions based on fresh data on the economy.

Powell emphasizes that more interest rate hikes may become relevant, if there is economic data that pulls in that direction. The Fed is prepared to do more, if necessary.

– A decision about a break was not made today, says Powell.

Powell also says that the forecasts for the economy going forward are modest growth, not recession.

The governor of the central bank says that there is an ongoing assessment of whether interest rates are tightening enough on the economy.

The Fed is trying to balance the risk of not doing enough and the risk of doing too much, and that at the same time several months of economic data are needed to see if their decisions around interest rates have been correct.

– The labor market is still extremely tight, says Powell.

Uncertainty around banking chaos

In the lead-up, there has been tension about what the governor of the central bank will say about the banking crisis that has hit the markets in recent months.

On Monday, the news came that the US authorities have closed First Republic Bank, and that the US’s largest bank, JPMorgan Chase, will pay NOK 113 billion to take over the bank.

First Republic Bank is the second largest bank to fail in the United States, after Washington Mutual which went bankrupt during the 2008 financial crisis.

This is also the third bank collapse in the US since March, when Silicon Valley Bank (SVB) and Signature Bank went bankrupt as a result of customers withdrawing money too quickly.

There is now great tension as to how the bank collapse will go beyond the local and regional banks in the USA in the future.

After the last interest rate decision in March, central bank governor Powell said that the Fed was prepared to use all possible tools to maintain safety, soundness and efficiency in the banking system.

Powell also said the Fed would conduct an internal review of how it handled the crisis and work to ensure it never happens again.

Growth in the economy moderated

In the minutes from the previous interest rate meeting, the Fed pointed out that the forecasts for the economy included a “mild recession” starting later this year. The central bank then expects the economy to recover over the following two years.

Several of the members of the interest rate committee stated that the effects of the banking crisis on economic activity and price growth led them to lower their interest rate assessments.

After the last interest rate meeting, figures have also come in which showed that economic activity was weaker than expected in the first quarter.

Growth moderated to 1.1 per cent in the first quarter of the year, down from 2.6 per cent in the fourth quarter. In advance, it was expected to moderate to 1.9 percent.

The decline was mainly due to less investment, and was only partially offset by increased consumption and an increase in exports.

Inflation remains high

PCE inflation (personal consumption expenditure), the central bank’s favorite measure of price growth in the US, moderated to 4.2 per cent in March, down from five per cent in February.

Core PCE inflation, which excludes food and energy prices, came in at 4.6 percent.

At the same time, wage growth in the US came in at 1.2 per cent in the first quarter, up from 1.0 per cent in the fourth quarter.

The goal of the US central bank is to keep price inflation stable at around two percent over time.