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Interest rates may have peaked in the US

Interest rates may have peaked in the US

The US Federal Reserve left interest rates unchanged for the second time in a row. So the key interest rate is at 5.25 to 5.5 percent – the highest level in more than 20 years. At the same time, Federal Reserve Chairman Jerome Powell emphasized that the question of an interest rate cut is now out of the question. The central bank is considering whether to increase this further. However, nothing has been decided yet on future interest rate measures.

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The central bank has raised the key interest rate eleven times in 16 months in a fight against high inflation – most recently by 0.25 percentage points in July. It was one of the fastest and sharpest interest rate hikes in its history.

Central bankers then took a break in September — just as they did in June. Wednesday’s decision was the first time since early last year that the key interest rate was left unchanged at two meetings in a row.

The central bank is weighing in

In making its decisions, the central bank weighs the risk of inflation and the risk of the economy slowing down too slowly. Higher interest rates slow inflation — but also consumer spending, a key component of the U.S. economy. This is because borrowing to buy houses or cars makes it more expensive, among other things.

From March 2022, the central bank has raised its key interest rate by more than five percentage points. The rapid inflation was fueled by rising energy prices after the Russian attack on Ukraine. Powell reiterated that the Fed’s central goal is to bring inflation to two percent over the long term. High inflation reduces purchasing power and affects consumers, he said.

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Inflation is weakening

The latest economic data shows inflation is above the central bank’s target, but remains weak – and economic growth has remained high at the same time. From the point of view of some experts, this is an unusual situation. Powell called the U.S. economy “surprisingly resilient.”

Despite higher interest rates, GDP grew 4.9 percent in the summer compared to the previous quarter. It was the strongest growth in the world’s largest economy in seven quarters. Economists on average had expected growth of just 4.5 percent.

A boom in the U.S. economy risks re-accelerating inflation. The question for the future is whether the central bank will consider the necessary additional rate hikes later. If the economy is strong, some experts in the US can imagine this as early as December or next year.

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On the other hand, defaults on service loans have recently picked up again and more consumers in surveys have spoken of financial distress. This may indicate that consumer spending will cool even without further interest rate hikes.