With the highest interest rate hike in 22 years, the US Federal Reserve (Fed) has intensified the fight against the recent increase in inflation in America.

It raised the key interest rate by half a percentage point between 0.75 and 1 percent.

In addition, Fed Chairman Jerome Powell made it clear on Wednesday evening that further rate hikes of this magnitude are under discussion.

At the same time, the Fed announced that it would reduce bond portfolios built up as part of quantitative easing from June instead of completely replacing maturing securities with new ones.

Winand von Petersdorff-Campen

Economic correspondent in Washington.

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Markus Fruehauf

Editor in Business.

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"Inflation is way too high," Powell said.

It was 6.6 percent in March, and 5.2 percent adjusted for food and energy prices.

Although the measures represent the largest monetary tightening in two decades, relief spread in financial markets on Wednesday and Thursday that the Fed was not more aggressive in attacking inflation.

Powell supported US stocks' rally, which sent the Dow Jones index up almost 3 percent on Wednesday, with assurances that the Fed was not considering rate hikes of 0.75 percentage points or 75 basis points at the moment.

The German share index Dax rose by 2.5 percent on Thursday and surpassed the 14,000 point mark in the early part of the business.

As trading progressed, the initial euphoria weakened.

In the evening, the Dax closed at 13,886 points.

Wall Street also recorded heavy losses during the day.

The initial rally was also helped by the fact that the Fed is only slowly starting its tapering program for the bond portfolio, which has accumulated to almost 9 trillion dollars.

Apparently, at least some investors had expected bigger steps.

Powell spread confidence that the Fed could pull off a "soft landing."

What is meant is that it can successfully lower inflation without triggering a recession in the United States.

Analysts at Deutsche Bank, for example, do not share this confidence.

However, Powell acknowledged that significant uncertainty is weighing on economic forecasts.

The Russian war of aggression as well as the failed pandemic policy in China would bring new risks that could trigger more inflation.

Already priced in on the markets

Allison Boxer, US economist at bond fund company Pimco, considered the most important news to be that Powell had moved away from the 75 basis points that the markets had already priced in.

Boxer sees the fact that the Fed has to be flexible in evaluating the incoming data as an indication that the Fed will use the summer to reverse the interest rate cuts caused by the pandemic.

America's central bank is thus also putting more pressure on the European Central Bank (ECB) to finally act.

"Mrs. Lagarde, that's how it works!" commented the economist Otmar Lang from Targobank on the Americans' move.

Especially at the “long end”, i.e. with long-term interest rates, the ECB is already feeling the consequences of the Fed’s progress with capital market interest rates.

In the euro zone, the inflation rate does not yet have an eight before the decimal point, as it did in the United States, but it was still 7.5 percent in April.

The ECB has announced that the first interest rate hike would be possible in July.

The central bank's bond purchases should end before then.

However, the timing of the first step is still controversial.

On Thursday, representatives of the ECB Executive Board once again emphasized the "uncertainty" caused by the war in Ukraine, which affects Europe more than America.

Unlike the Fed, the ECB is not planning to raise interest rates suddenly, but wants to raise interest rates “gradually”, i.e. step by step, as ECB chief economist Philip Lane said.

Negative deposit rate no longer appropriate

Lane emphasized that in the euro area, unlike in the United States, demand has not played such an important role in inflation and the labor market is not developing as dynamically either.

The increase in price is mainly due to the energy price shock and the supply bottlenecks.

Nonetheless, he suggested that a deposit rate of minus 0.5 percent is no longer appropriate if inflation is close to target over the medium term.

ECB board member Fabio Panetta also urged prudence.

Inflation is rising while the European economy is de facto stagnating: "That makes the ECB's decisions more complicated." Tightening monetary policy with the aim of curbing inflation could curb the flagging growth.

"The major economies are suffering," Panetta said.

He therefore advocated waiting for the economic data from the second quarter before raising interest rates.

The bond markets also viewed the Fed's decision and the latest signals from the ECB as the all-clear for an unexpectedly strong tightening of monetary policy.

The yield on the ten-year federal bond made up for afternoon losses in the evening and returned 1.05 percent.

The yield on the two-year Treasury note fell slightly to 0.28 percent after rising to more than 0.3 percent a few days ago.

Falling bond yields are associated with price gains.

The euro was somewhat weaker, falling back to around the $1.05 mark.