The Fed increased the official rate in the US from 0.75 to 1 percent. The central bank appears keen to keep its promise of December last year. At the time, the Federal Open Market Committee (FOMC) implied that the official rate would be raised three times in the course of 2017. Is this unexpected rate hike in March a reason for sceptics as yours truly to expect two additional rate hikes? In my view, we should still call such expectations seriously into question.

First about that rate hike earlier this week. I am increasingly convinced that this step should be seen as something the Fed could not possibly avoid, rather than as a rate increase that the Fed could have postponed further.

While the Fed was fighting against the dangers of deflation until recently, in the meantime the loss in purchasing power in the US reached 2.7 percent. Even if we, as the Fed often does, look at so-called core inflation (that is, inflation less food and energy), we can observe that prices are rising with more than 2 percent a year. That is something the Fed has been trying to achieve for years. 

The Devil Is in the Details

It’s the Purchasing Power, Stupid!


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