What has happened?
The US central bank raises the key interest rate from 3.50-3.75 percent to the new range of 3.75-4.00 percent. It is the first increase in over three years. In doing so, new head Kevin Warsh is challenging President Trump, who has said he wants the Federal Reserve to cut interest rates.
Warsh took office in May. He has certainly made it clear that inflation is too high and that the Fed should bring it down. But otherwise he has not given any clear information about the central bank's plans. Therefore, it was not entirely clear what announcement would come, even if the market expected an increase.
The Fed's goal is for inflation to be 2 percent. Last week, figures came out showing that inflation in August was 3.5 percent in the United States. A good bit over the target. To that can be added that the price of oil is still at a high level as a result of the war between the USA and Iran. More expensive oil means an increased risk of inflation taking off further.
Assessors also believe that there may be more interest rate increases in the future. When the Fed has started to raise, it has often been followed by more hikes, history shows.
President Trump wants to see interest rates cut - does the Fed chief ignore it?
Warsh succeeded Jerome Powell as chairman. Powell was heavily criticized by Trump for not cutting interest rates, and the president appointed Warsh to take over the prestigious post.
There have been concerns that Warsh would join Trump's leadership and that the US central bank's independence would be damaged. Independence is a cornerstone of a central bank, which should be able to make decisions that are best for the economy - not for governing politicians.
Now Warsh is caught between Trump's demands and high inflation. Trump has even made the strange threat that if Warsh doesn't cut interest rates, the president will cut off trade with countries where the US has a trade deficit.
Wednesday's hike shows that concerns about the Fed's independence have been put to rest — at least for now. It remains to be seen how President Trump reacts to this.
It should be added that the chairman of the Fed does not decide the interest rate himself. The decision is made by a committee with an additional eleven people, and Wednesday's announcement was unanimous. Which also gives an image of an independence against Trump.
What does the main character Kevin Warsh say?
- Inflation is still high. Today's monetary policy action will lead to a faster return to the Executive Board's target of 2 percent, Kevin Warsh said at the press conference in connection with the announcement.
- Inflation is too high and has been so for too long, he also stated.
Something that can be interpreted as that he will not back down from more interest rate increases. Forecasts from the Fed in connection with the decision can also be interpreted as that there will be another increase this year, according to the news agency Direkt.
How are the markets reacting to the announcement?
The American stock markets showed no dramatic changes on the announcement. The dollar strengthened marginally against the krona and US interest rates rose slightly. Investors may be counting on more increases from Kevin Warsh to come.
What does the decision mean for us in Sweden?
For the Swedish part, there will be no direct impact. Not like when the Swedish Riksbank changes the interest rate that directly affects variable mortgages.
But one factor for Swedes is how the American stock exchanges receive the announcement. We Swedes have much of our savings – both private and for retirement – invested in American stocks.
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