The US Federal Reserve has decided to maintain its current key interest rate, which stands at its highest level in 22 years, in an effort to curb rising prices that have recently reached near-record levels.
The Federal Reserve has retained its rate target of 5.25% to 5.5%.
The central bank has been incrementally increasing interest rates with the aim of tempering economic growth and curbing inflation, which measures the rate at which prices are climbing.
This decision follows recent data indicating faster-than-expected economic growth in the United States.
Raising interest rates is a tool employed by central banks to combat inflation. The rationale behind this strategy is that by increasing interest rates and making borrowing more expensive, consumers are inclined to spend less, resulting in a slower rate of price inflation.
The Federal Reserve has faced criticism, with some suggesting that maintaining higher interest rates could potentially put the US economy at risk of entering a recession.
However, the economy experienced a stronger-than-expected growth rate of 4.9% from July to September. This growth was largely attributed to a tight job market and increased consumer spending.
In a statement issued on Wednesday, the Federal Reserve declared that the decision to maintain interest rates was unanimous and that it is prepared to adjust its policy “as appropriate” should new risks emerge.
The central bank noted that holding the rate steady would provide time to “evaluate additional information” regarding the performance of the economy.
Jerome Powell, the Chairman of the Federal Reserve, indicated that a few months of positive economic data are just the “beginning of building confidence” that inflation is moving toward its target. He acknowledged that there is still a long way to go and expressed understanding that high inflation imposes hardship by eroding consumers’ purchasing power.
The decision to keep interest rates unchanged signals that the central bank may postpone any interest rate reductions, as inflation remains at 3.7% in the US, still above the Fed’s target of 2%.
Independent US economic analyst Peter Jankovskis told the BBC that the decision to hold rates was “not a major surprise” and had “no immediate impact on stocks.”
He also pointed out that “elevated long-term bond yields” were a contributing factor to the Fed’s decision, as the yield on long-term government bonds serves as an important indicator of investor confidence in the strength of the US economy.
Chairman Powell also noted that there were “significant issues” that the central bank had to consider, including heightened global geopolitical tensions, such as the situation in Ukraine, and the Israel-Gaza conflict, which the Fed was monitoring for its economic implications. The Fed is proceeding cautiously given the global risks.
Jankovskis emphasized that the Fed appears to view the US economy as robust and is focused on assessing whether additional rate increases might be necessary. The theme seems to be “higher for longer.”
In many economies, higher borrowing costs have led to increased expenses for businesses, homes, and other goods and services, marking the end of an era of low-cost borrowing.
Similarly, in the UK, households have faced budget constraints due to higher mortgage payments and borrowing costs.
The Bank of England is widely expected to maintain its current interest rate when it announces its next decision on Thursday. In September, the rate was left unchanged, concluding a series of 14 consecutive rate hikes.
Last Updated: 02 November 2023
