- Fed Maintains Unchanged Interest Rates
- Inflation Concerns and Projections
- Factors Influencing Central Bank Policy
The US central bank has announced that interest rates will remain unchanged, the first time in more than a year that this decision has been made.
The Federal Reserve maintained the target range for its benchmark interest rate at 5% to 5.25 percent, citing the need for additional time to assess the impact of previous rate increases.
The bank has increased interest rates ten times since March 2022 to rein in inflation.
Most bank forecasts indicate that interest rates will continue to rise.
This would be consistent with the approach taken by central banks in countries such as Australia and Canada, which recently announced rate increases after a pause, citing persistent inflation pressures.
“A pause is not the end,” stated Diane Swonk, chief economist for KPMG in the United States. They do not wish to relax their vigilance regarding inflation just yet.
Since last year, when the Ukraine crisis raised food and energy prices, US inflation has slowed.
Consumer prices rose 4.0% year-over-year in May, up from 0.1% the month before, according to Tuesday’s Labour Department report.
However, this remains above the 2% rate considered healthy by the bank. In addition to food and energy, the prices of a variety of other goods continue to rise consistently.
To fight inflation, the Fed hiked its benchmark rate from near zero to over 5% in 18 months. This marked a historic transition after more than a decade of historically low-interest rates.
Chairman of the Federal Reserve Jerome Powell has stated that he wants to give the economy time to acclimatize to the change, which will result in higher costs for mortgages, business loans, credit cards, and other forms of borrowing.
Theoretically, higher costs should reduce the demand for financing for home purchases, business expansions, and other activities, eventually cooling the economy and reducing price-inflationary pressures.
Despite property sales plummeting, the economy has performed better than expected.
According to projections that accompanied the rate announcement, Fed policymakers now anticipate that the economy will expand by 1% this year, which is a faster rate of growth than was anticipated in March. In addition, the unemployment rate is projected to be 4.1%, which is lower than previous estimates.
The projections also indicate that officials anticipate making less progress in controlling inflation than they did in March.
At least one official anticipates that the Fed’s key rate will rise above 6% by the end of the year.
Following the announcement, the three main U.S. indexes dropped.
Charles Lieberman, chief investment officer at Advisors Capital Management, stated that inflation has not decreased quickly enough, but the pause is a recognition of the risk that the Fed’s sudden, sharp increase in rates to more than 5% could precipitate an economic slowdown, resulting in millions of job losses.
The bank is also trying to account for recent bank failures, which could limit lending.
“Five percentage points is just completely enormous …. Mr. Lieberman, a former employee of the Federal Reserve Bank of New York, described this as a significant impact. It does not imply that they are necessarily complete.
Ms. Swonk stated that the public should not anticipate a restoration to lower rates shortly.
Due to factors such as increased geopolitical tensions, a shift to regional supply chains, and more frequent extreme weather events that disrupt food supplies and prices, she stated that the economy has become “much more inflation-prone” in general.
“You will see a much more activist central bank policy with higher bouts of inflation and bouts of rate hikes,” she said.
