Fri, Nov 03, 2023 page12

• US Federal Reserve holds rates at a 22-year high

  ‘TIGHTENING EFFORT’: Despite strong economic data, the Fed’s decision was made easier by a surge in the yields on longer-term US government bonds

  • AFP, WASHINGTON
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  The US Federal Reserve on Wednesday voted to hold interest rates at a 22-year high for a second straight meeting, as it moves to slow stubborn inflation without damaging the strong US economy.

  The Fed’s decision to keep its benchmark lending rate between 5.25 percent and 5.5 percent gives policymakers time to “assess additional information and its implications for monetary policy,” the central bank said in a statement.

  “The process of getting inflation sustainably down to 2 percent has a long way to go,” Fed Chair Jerome Powell said at a news conference, referring to the Fed’s long-term target for interest rates.

  

  US Federal Reserve Chair Jerome Powell departs a news conference on Wednesday after the Fed refrained from raising interest rates following its two-day conference in Washington.

  Photo: EPA-EFE

  He added that the Fed “is not thinking about rate cuts right now, at all.”

  The Fed’s widely expected decision to hold rates steady marks the first time officials have done so at two consecutive meetings since they began tightening monetary policy last year.

  Since peaking at more than 7 percent in June last year, inflation as measured by the Fed’s favored yardstick has slowed by more than half — although it remains stuck firmly above 3 percent.

  Many analysts, including those employed by the Fed, were predicting the US would enter a recession this year due to the rapid pace of interest rate hikes.

  When the Fed hikes interest rates it raises the cost of borrowing from the bank, which normally dampens economic activity and weakens the labor market, but despite its aggressive monetary tightening, the Fed noted that “economic activity expanded at a strong pace in the third quarter.”

  “Job gains have slowed in recent months, but remain strong, and the unemployment rate has remained low,” it said.

  The Fed’s decision to pause would likely fuel expectations that it is done hiking interest rates and is moving instead to a prolonged pause.

  “This is a Fed that wants to be done hiking rates,” economists at Citi wrote in an investor note after the decision was announced. “In our base case, the Fed will stay on hold and inflation will continue to run above target until a recession loosens the labor market and brings down inflation.”

  Pantheon Macroeconomics chief economist Ian Shepherdson took a different view, saying that: “No decision on December has yet been taken,” and that the upcoming employment and inflation data would be key.

  Despite the strong economic data, the Fed’s rate decision has been made easier by a surge in yields on longer-term US government bonds.

  Whereas the Fed’s key short-term rate mainly affects the borrowing rates offered by banks, Treasury yields determine “everything from mortgage rates to corporate and municipal bond yields,” KPMG chief economist Diane Swonk wrote in a note to clients.

  The Fed is “attentive to the increase in longer-term yields, which have contributed to a tightening of broader financial conditions since the summer,” Powell said.

  EY chief economist Gregory Daco said that the Fed’s reference to tighter financial conditions in its interest rate announcement was “a nod to the fact that financial markets are doing some of the Fed’s tightening effort.”
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