Highest level in 22 years
Fed extends interest rate pause
November 1, 2023, 7:18 p.m
For the second time in a row, the US Federal Reserve is leaving interest rates unchanged. It remains unclear whether the end of the flagpole has been reached. Inflation is still too high and the robust economy would justify a further step. However, there are signs of declining consumer spending.
The US Federal Reserve is once again not touching the key interest rate. As expected on the financial markets, it left the key monetary policy rate in the range of 5.25 to 5.50 percent. This is the highest interest rate level since 2001 and therefore for 22 years. For the first time since the interest rate hikes began in March 2022, the monetary authorities kept their feet still at two meetings in a row. The central bank wants to curb high inflation and has already raised interest rates sharply.
US Federal Reserve Chairman Jerome Powell has signaled that the Fed can now be more patient after its aggressive series of hikes. One reason for this is that financing conditions have tightened. This means that the financial markets are already moving in the direction desired by the Fed.
It is uncertain whether there will be another increase in interest rates. In their updated outlook in September, the monetary authorities had envisaged a further increase of a quarter point for this year. The high inflation remains stubborn and has not yet given the central bank any reason to give the all-clear. Consumer prices rose by 3.7 percent in September, at the same pace as in August. The Fed is aiming for a value of 2.0 percent.
Stable economy – struggling consumers
Higher interest rates slow price increases – but also consumer spending, which is the mainstay of the US economy. Because this makes it more expensive, among other things, to buy houses or cars on credit. The latest economic data showed that inflation remains higher than the Fed’s target, but is weakening – and economic growth is at the same time high. From the point of view of some experts, this is a rather unusual situation. Despite the high interest rates, gross domestic product rose by 4.9 percent in the summer compared to the previous quarter. That was the strongest growth in the world’s largest economy in seven quarters. Economists had on average only expected growth of 4.5 percent.
The boom in the US economy carries the risk that inflation could pick up speed again. The question for the future now is whether the Fed might consider further interest rate hikes necessary later on. Some experts in the USA can already imagine this for December or next year if the economy remains strong.
On the other hand, defaults in servicing loans have recently increased again and in surveys more consumers spoke of tightening finances. This could indicate that consumer spending may be cooling even without further interest rate hikes.