U.S. key interest rates likely to increase to 1.9 percent this year

The United States has showed clear signals of raising key interest rates at last. It seemingly intends to hold back the rising prices to the worst levels in 40 years in the domestic market despite dark clouds over the global economy due to the Russian invasion of Ukraine.

The U.S. Federal Reserve on Wednesday (local time) announced after two-day regular sessions of the FOMC Meetings that the key interest rates of zero to 0.25 percent will go up by 0.25 percentage points to 0.25 to 0.5 percent, marking its first move to increase key interest rates in three years and three months since December 2018. Following the COVID-19 outbreak in March 2020, the Fed has cut interest rates considerably to keep them almost zero for two years.

The Fed implied that each of the remaining six FOMC Meetings by the end of this year will end up with higher interest rates. FOMC members projected interest rates to reach an average of 1.9 percent later this year on a dot plot on an outlook for variations in interest rates analyzed by the members. That is, it is no different than a prior notice that all the six remaining meetings will conclude rises in interest rates if each of the meetings down the road this year is expected to increase interest rates by 0.25 percentage points. The average interest rate is projected at 2.8 percentage points later next year, according to the Fed. This implies that it will continue to raise interest rates not only for the remainder of this year but also over the following year.

　

U.S. news reports assessed that the Fed’s announcement is somewhat based on a hawkish policy note with monetary austerity prioritized on the list in that it strongly confirmed its will to continuously increase interest rates going forward. Fed Chair Jerome Powell implied that austerity measures can be taken at an accelerated pace according to conditions, saying that if the Fed conclusively considers an earlier interest rate hike appropriate and timely, it will make it happen.

　

As the Fed’s determination to ensure higher interest rates was thought of as circumstantial evidence that the U.S. economy is still robust, the U.S. stock prices took a sudden rise at Wednesday’s closing.


Jae-Dong Yu jarrett@donga.com