Touching the ceiling :: Dienas Bizness

On March 22, the management of the US FRS once again raised the base interest rate of the US dollar. The new base interest rate corridor is 4.75% – 5.00% (charts often show the upper mark of the corridor). For the first time since September 2007, the upper limit of the dollar base interest rate has reached the 5% mark.

On March 16, we marked the first day of the year since the US FRS began its interest rate hike cycle, and in total, this is the ninth increase in the dollar’s base interest rates in nine consecutive meetings, and the total increase in interest rates has already reached a record high of 475 basis points in a record short time.

At the same time, the US FRS promises to continue reducing its assets. As recently as March of last year, US FRS assets exceeded $8.96 trillion, but assets have already been reduced by more than $320 billion so far. This is the net result considering also that due to the bankruptcies of some US banks and the subsequent instability in the financial market, the central bank has increased its assets by almost 300 billion dollars in the last two weeks to improve market liquidity.

Reasons for the decision

Despite the upheavals in the banking sector in the last couple of weeks and the resulting ripples in the financial market, the US dollar continues its fastest rise in interest rates since the late 1970s. However, the end of the cycle of interest rate hikes is already visible and the interest rate ceiling seems to be close. At the moment, judging by the materials published by the US FRS, it looks like another small increase in interest rates could be expected in the next few meetings, and then a not-too-long pause, possibly followed by a rate cut at the end of the year.

The head of the US FRS, however, dampened the joy over the end of the rate hike by promising that if it is necessary to fight inflation, the rate hike can be continued. At the moment, the opinion on how dollar interest rates might behave has changed, as the central bank expects that the events of the last few weeks will worsen the situation in the US credit market, which will have the equivalent effect of raising rates. If the central bank is right, then the increase in credit prices carried out so far, together with stricter requirements for borrowers, has resulted in a slowdown in consumption and a decrease in the inflation rate.

Contrary to the ECB, which raised its forecast for euro area GDP to 1% for this year, the US FRS lowered its economic growth forecast for this year from 0.5% to 0.4%. The unemployment rate is still expected to rise towards 4.5%, but the central bank admits that there are still plenty of vacancies and the labor market is strong. Either way, any given forecast is subject to great uncertainty, and central banks on both sides of the ocean are ready to react quickly to economic or financial market changes, as the US FRS has amply demonstrated over the past couple of weeks.

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