December 4, 2022

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- Inflation is too high - E24

– Inflation is too high – E24

On Monday, the US Federal Reserve opens larger interest rate hikes in the face of smoldering inflation.

US Federal Reserve Chairman, Jerome Powell.
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US Federal Reserve Chairman Jerome Powell speaks at a conference in Washington on Monday afternoon Norwegian time — a week after he raised interest rates for the first time since 2018.

The background is the highest price growth in 40 years in the US, while the back-to-back effects of the pandemic and war in Ukraine characterize the market.

The labor market is very strong and inflation is very high, says the central bank governor in a speech today.

The three major indices on Wall Street fell after the speech was published, while interest rates on 10-year US government bonds rose.

“There is a clear need to act quickly to bring monetary policy back to a more neutral level,” Powell said.

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The United States raises interest rates and warns sharply of higher interest rates

Open for big increments

Powell confirmed that the central bank “will take the necessary steps” to ensure that inflation returns to normal. The central bank governor says this could mean higher interest rates.

If we conclude that it is appropriate to act more aggressively by raising the “federal funds rate” by more than 25 basis points at a meeting or in meetings, we will do so, says Powell.

He asserts that if the central bank also believes that a more restrictive monetary policy is needed than usual, it will introduce it as well.

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What the US Federal Reserve does affects financial markets around the world, including Norway.

A jump in prices after the invasion of Ukraine

In today’s speech, Powell also noted that the war in Ukraine is helping to raise prices for energy, food, and other raw materials. This is at a time when inflation is already high.

Normally, a central bank would accept a short-term inflation jump associated with a commodity price shock, but:

“However, the risk is growing that a longer period of high inflation could push long-term expectations uncomfortably higher, underscoring the need for the committee to move forward quickly, as I described,” Powell said.

Read on E24 +

The war in Ukraine affects the prices of these goods

Waiting for the interest rate to jump on the assembly line

Thus, inflation in the US rose to 7.9 per cent in February – the highest level since January 1982.

Bottlenecks and delays in global value chains after the virus pandemic have been partly to blame. In addition, the prices of oil, gas and other raw materials jumped sharply after the Russian invasion of Ukraine.

In the face of this, the US Federal Reserve announced a number of rate hikes in the future. After last week’s interest rate meeting, it emerged that the Fed is now envisioning a rate hike at each of the next six meetings this year.

In this case, it would mean that the interest rate in US politics would be around 1.9 percent at the end of the year.

In addition, the central bank expects to raise interest rates at every other meeting next year, and that the interest rate will be 2.8 percent by the end of 2023.

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