As it waits to see if its historic string of rate hikes over the past 18 months can bring inflation under control, the Federal Reserve maintained the benchmark interest rate for the United States steady on Wednesday.
Despite noting that inflation is still higher than its 2% target, the central bank kept its main policy rate at its current level of 5.25% to 5.50%. It did so in response to improving economic conditions.
The Fed boosted its benchmark rate at 11 consecutive meetings starting in March of last year and continuing through its meeting in July, an unprecedented rate of rate increases.
As U.S. consumer prices started to rise in late 2021 and hit 40-year highs last summer, it did that to try to limit inflation.
According to the Bureau of Labor Statistics, consumer prices increased 3.7% in August compared to the same month last year. That’s higher than the 2% yearly level the Fed says it prefers, but it represents a significant improvement over the top of 9.1% last year.
The Fed came to the conclusion on Wednesday that things had improved enough for it to adopt a wait-and-see strategy.
After the Covid epidemic began, the central bank lowered interest rates to a range of 0% to 0.25%. Additionally, rates remained at that historically low level for years following the global financial crisis of 2007–2008.
Interest rates increased significantly during a period of time, rising from a record low of practically zero to their highest point in more than 20 years. As a result, interest rates on mortgages and credit cards also increased to historic highs, while Treasury bond payments and checking account interest rates are at their highest levels in recent memory.
The sword of economic intervention has two edges.
By slowing the economy, which is a direct outcome of making it more expensive for firms and individuals to borrow money, the rate rises were intended to curb inflation. There are indications that the rate increases are having the desired effect, and there is even some hope that the Fed will succeed in its mission without sending the economy into a recession.
For instance, the labor market is still robust, with earnings increasing and the unemployment rate close to historic lows.
In contrast, a recession may result in lower inflation but also significant job losses.
Investors had long held that worry, thus some of the Fed’s more hawkish actions resulted in stock market declines.
The Federal Open Market Committee will convene once more on October 31 and will decide on the next interest rate on November 1. In light of this, the consumer pricing data for September, which is anticipated to be announced on October 12, will be particularly significant in determining the next move by the central bank.
“This does not guarantee that there won’t be another hike in interest rates in the upcoming months. The likelihood of further increases in oil prices and the general easing of inflation pressures prevent the Fed from declaring victory just yet, according to Greg McBride, chief financial analyst at Bankrate.