Fighting A Protracted Battle: US Federal Reserve Perspective

Fighting A Protracted Battle: US Federal Reserve Perspective

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Here's the lowdown on the anticipated interest rate adjustments by the Federal Reserve and the European Central Bank in September. The Fed's on the fence about whether to bump rates up by 0.5 or 0.75 percentage points, with economic slowdown being the key concern to tame inflation. Meanwhile, the European Central Bank (ECB) has dropped hints about another significant rate hike in September.

Following the Federal Reserve's latest interest rate summit, minutes were published on July 26-27. During this meeting, a hefty 0.75 percentage point rate hike was decided to combat rampant inflation, as seen in the previous month. Financial experts were keeping their eyes peeled for any insights on the magnitude of the next rate hike in September. Fed Chair Jerome Powell had floated the idea of another massive rate hike in September, potentially pushing the economy into a restrictive rate environment that might dampen growth.

Contrary to expectations, the minutes revealed no firm preference for the size of the next rate hike (0.5 or 0.75 percentage points), stating it would hinge on the data situation. Post the minute's release, the odds of a smaller 0.5 percentage point hike soared to nearly 60 percent on the financial markets.

According to the minutes, participants in the meeting also anticipated that resolving the inflation issue could take longer than initially thought. The central bank's tightening of monetary policy plays a pivotal role in reducing overall economic demand, thereby alleviating price pressure. Currently, the key interest rate ranges between 2.25 and 2.50 percent.

July saw consumer prices escalate by 8.5 percent year-on-year, decelerating slightly from June's 9.1 percent surge. The US inflation figures for August, due to be revealed before the central bank's September meeting, are expected to heavily influence the interest rate decision.

In the meantime, the ECB could potentially ratchet up interest rates significantly again at its September assembly, despite the looming threat of a recession. ECB board member Isabel Schnabel told Reuters that the inflation outlook hasn't shown signs of improvement since the July meeting. "In July, we decided on an increase of 50 basis points given the inflation outlook. Currently, I don't think that outlook has undergone a fundamental change," Schnabel stated. The ECB operates on a meeting-by-meeting basis, reacting to incoming data. "If I analyze the latest data, I would say that the concerns we had in July haven't vanished," Schnabel added. The ECB's next interest rate rendezvous is set for September 8.

Sources: Reuters

1. Despite the uncertainty surrounding the Federal Reserve's decision, financial experts are closely observing the Business sector, as any interest rate adjustments could significantly impact Finance.
2. The European Central Bank's threat of another substantial interest rate hike in September is causing ripples in the Business world, with concerns over potential economic slowdown and the risk of recession looming large.

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