The Federal Reserve has decided to keep interest rates steady, despite two consecutive months of accelerating inflation. The decision was released on Wednesday, with the Fed indicating that it still expects one more rate hike before the end of the year, and fewer cuts than previously indicated for next year.
Out of the 19 policymakers on the Federal Open Market Committee (FOMC), 12 believe that one more rate hike this year would be appropriate, while the remaining seven favor holding rates steady. This was confirmed by Fed Chair Jerome Powell, who stated that 12 officials support another rate hike before the end of 2023, while seven would prefer to maintain the current policy stance.
The economic projections released by the Fed show that most policymakers anticipate the need for one additional rate hike before the end of this year. However, there is still a possibility of a twelfth rate hike, as the FOMC maintained its forecast for rates to peak at 5.5% to 5.75% this year. This cautious approach is aimed at allowing policymakers to monitor how inflation, the job market, and economic growth respond before making further decisions.
The Fed's goal is to snuff out inflation with higher interest rates without raising borrowing costs enough to slow the economy into a recession.[0] They are aware that rate increases can take more than a year to show their full effect, which is why they are cautious about hiking too much, too soon.[0]
The decision to keep rates steady is good news for many, especially for those who were waiting for the right time to act. However, it is important to note that interest rates are still elevated, with the benchmark rate already at a 22-year high.[1]
The Fed's decision also comes in light of improved economic growth expectations. The economic projections released on Wednesday show that policymakers expect the economy to grow 2.1% this year and 1.5% in 2024, which is higher than previously estimated.[2] They also predict a lower unemployment rate than initially projected.[3]
Despite the positive economic outlook, inflation remains a concern. The annual inflation rate is still well above the Fed's 2% target, although it has fallen from its peak last summer.[4] Core inflation, which excludes volatile food and energy prices, is running at a 4.2% rate, indicating that inflationary pressures are still present.[4]
The Federal Reserve has already raised interest rates 11 times in the last 18 months, the most aggressive series of rate hikes since the early 1980s.[5] This has led to the benchmark borrowing cost being between 5.25% and 5.5%.[6]
Overall, the Fed's decision to keep rates steady reflects a cautious approach to balance inflation control with economic growth. The improved economic outlook provides some relief, but inflationary pressures remain a concern. The Fed will continue to monitor the situation and make decisions accordingly to maintain stable economic conditions.
0. “Fed keeps rates steady as hikes take toll on economy” The Hill, 20 Sep. 2023, https://thehill.com/business/4214437-fed-keeps-rates-steady-as-hikes-take-toll-on-economy/
1. “Interest rate hikes are on hold. Is that good news for homebuyers?” CBS News, 20 Sep. 2023, https://www.cbsnews.com/news/interest-rate-hikes-on-hold-is-that-good-news-for-homebuyers/
2. “U.S. Fed Keeps Key Interest Rate Unchanged, Signals One More Hike This Year” BQ Prime, 20 Sep. 2023, https://www.bqprime.com/markets/us-fed-keeps-key-interest-rate-unchanged
3. “Fed holds interest rates steady – for now” BBC, 20 Sep. 2023, https://www.bbc.com/news/business-66869039
4. “Fed declines to hike, but points to rates staying higher for longer” CNBC, 20 Sep. 2023, https://www.cnbc.com/2023/09/20/fed-rate-decision-september-2023-.html
5. “Federal Reserve pauses rate hikes as inflation slows down” NBC News, 20 Sep. 2023, https://www.nbcnews.com/business/economy/federal-reserve-pauses-interest-rate-hikes-inflation-economy-slow-rcna105615
6. “Will interest rates on savings accounts continue to go up after the Fed’s upcoming decision?” Sacramento Bee, 19 Sep. 2023, https://www.sacbee.com/news/business/article279514829.html
