In a noteworthy shift, the US Federal Reserve has decided to hold interest rates at the current level of 5%-5.25%. This decision marks the first time the central bank has not increased the rates since March 2022. The Federal Reserve is choosing to evaluate the economic effects of the previous rate hikes before moving forward.
Despite this pause, the majority of bank officials project further increases, with predictions for the key rate to exceed 5.5% by year-end. Jerome Powell, Federal Reserve Chairman, stated that evidence of a significant slowdown in inflation has yet to be seen. Although inflation rates have dropped from last year's peak, they are not at the desired level.
While increased borrowing costs theoretically should lead to lower loan demand, hence cooling the economy and reducing price pressure, the economy has remained surprisingly resilient. Nevertheless, the Federal Reserve remains watchful of potential risks, including recent bank failures, which may lead to further reductions in lending.
The Federal Reserve's announcement impacted Wall Street, causing the three main US indexes to dip as the implication of higher end-of-year rates than anticipated took hold.
Powell indicated that the potential future course of action for the Federal Reserve remains an open-ended question, and he ruled out the possibility of a rate decrease in the current year. Experts suggest that this holding pattern does not signify an end to increases, as concerns over inflation persist. Factors contributing to a potentially more inflation-prone economy include geopolitical tensions, regional supply chain shifts, and extreme weather events affecting food supplies and prices.