US Federal Reserve raises interest rates to 16-year high

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The US Federal Reserve increased interest rates by 0.25 percentage points. Therefore, it is between 5 percent and 5.25 percent. This is the highest value in 16 years!

This is the tenth rate hike by the Fed in a row. It had ended its low-interest policy a year ago to take action against runaway inflation. The inflation rate in the US is currently 5 percent. The Fed wants to bring inflation back to its 2 percent target thanks to interest rate hikes. However, observers assume that the Fed is currently taking a break in interest rates.

Fed walks a tightrope

Higher interest rates aim to reduce inflation because it means less money circulating in the market. Borrowing becomes more expensive. Investing the money in a savings account is more profitable. This is slowing down the economy, which has overgrown in many places after the corona pandemic, thus fueling inflation.

The dilemma: If money watchers raise interest rates too much, it will not only curb the economy’s overshoot, but also halt growth altogether and, in the worst case, cause a recession.

This also explains why Fed Chairman Jerome Powell (70) dared to take bigger steps of 0.75 percent last year, while raising interest rates “only” 0.25 percentage points for the second consecutive year. But the bank quake now makes such rate hikes impossible: Four regional banks have failed in the US since the start of the year, the latest being First Republic Bank earlier this week.

Fall in interest rates causes banks to stumble

In the long run, banks will benefit from higher interest rates – after all, customers will have to dig deeper into their wallets for loans. In the short-term, the banks on the return of interest rates took a wrong step.

Customers demand higher interest rates for deposits. At the same time, banks are sitting on mountains of fixed-rate government bonds. If banks purchased the securities before the interest rate return, that interest rate is zero. Bonds bring nothing anymore, the result is billions of dollars wiped out.

Low interest rate level in Switzerland

On Thursday afternoon, the European Central Bank (ECB), headed by Christine Lagarde (67), will also make a decision on interest rate developments. In Switzerland, the next rate decision will not be made until June.

However, the key interest rate will not rise to levels as in the US: currently 1.5 percent. At 2.9 percent, inflation in Switzerland is significantly lower than elsewhere. SNB boss Thomas Jordan (60) is therefore under less pressure than his colleagues abroad.

Source :Blick