The Federal Reserve is preparing for another increase in the key interest rate. However, market observers interpret this measure as likely the final step in the current interest rate hiking cycle. The US central bank's decision largely follows the expectations of the financial markets, while the immediate economic necessity for such a tightening is considered less pronounced. Dr. Björn Ohl from apoBank stated that the Fed would raise the key interest rate corridor by 25 basis points at its upcoming meeting.
The arguments for the expected key interest rate hike primarily lie in market technical and institutional aspects. Following the release of US inflation data for August and Fed Chairman Warsh's distinctly more restrictive speech in Jackson Hole, market participants have braced themselves for an interest rate hike. Failure to take this step could undermine the Fed's credibility in fighting inflation, lead to rising inflation expectations, and exert additional upward pressure on the yields of long-term US government bonds.
Historically, the US inflation rate has been significantly above the targeted 2 percent goal since March 2021. In recent months, the impression has emerged that both the patience and confidence of Fed officials have diminished regarding inflation reaching the target soon and without further interest rate adjustments. However, from a purely economic perspective, few indicators suggest the urgent necessity for monetary policy tightening at this time.
The exceeding of target inflation over the past 18 months is largely attributable to special effects. Increased tariffs and energy price hikes following the Iran War manifested as classic supply shocks. So far, neither significant second-round effects nor an unanchoring of inflation expectations are discernible. Nor are there currently any signs of demand-driven overheating in the US economy. The Fed is therefore likely to raise the key interest rate in September primarily because the markets have already fully priced in this step, and a deviation would entail significant communication risks.
From an economic perspective, therefore, the pressure to act is limited. Experts expect the September rate hike to be the last in this cycle. The October meeting date is in close proximity to the Midterm Elections, making an interest rate adjustment unlikely. By the December meeting, inflation developments are expected to become clearer, demonstrating that the currently elevated inflation is primarily due to temporary factors. This will likely move the medium-term inflation trend back towards the 2 percent target.
