Sarah Travers
Facing an indefinite economic future, Fed Chair Jerome Powell has halted the rise after a streak of ten meetings resulting in interest rate hikes.
In the first in over a year, the Federal Reserve announced it would maintain its benchmark interest rate at approximately 5%.
The rationale behind this decision is the recent easing of inflation. The Fed intends to determine whether previous rate increases have sufficiently controlled the price surge.
However, the Fed also hinted at the possibility of further rate hikes should inflation persist.
The Fed’s Open Market Committee acknowledged in a Wednesday statement that inflation continues to be high. The Committee is ready to tweak rates if risks hinder pursuing their target 2% inflation rate.
The Fed also updated its unemployment forecast, reducing it from 4.5% to 4.1%. The current unemployment rate is 3.7%.
This suggests that the Fed can persist with rate increases without triggering a spike in unemployment.
The Open Market Committee had raised interest rates ten times consecutively from March 2022 to May 2023 in response to climbing inflation.
However, the Bureau of Labor Statistics announced that the annual inflation rate had dropped to 4%, marking the lowest over two years.
Higher interest rates have had a significant impact, leading to the highest lending rates across the economy in years, from credit cards to corporate loans.
The Fed aims to cool down economic demand and decrease price pressure by making borrowing and investing more expensive.
Indeed, inflation has been dropping, from an annual peak of over 9% last June to 4% in May. However, this remains above the Federal Reserve’s 2% target.
As the central bank contemplates pausing its rate hikes, it plans to notify businesses and consumers of potential future increases.
“Why Rates May Remain High for Now” Neil Dutta, head of economic research at Renaissance Macroeconomics, insists that the case for continuing the rate hikes is strong. He points out that unemployment is far below the Fed’s projection, and economic growth seems to accelerate, citing a recent IMF forecast. Furthermore, he observes that bank lending, home prices, and stock prices are all starting to rise again.
Federal Reserve Bank of Cleveland’s president, Loretta Mester, sees no reason to halt the rate increases.
“Reasons to Pause” Others argue that the Fed need not continue its rate hikes at the current pace. They point out that stricter monetary policy usually takes time to affect the economy fully.
“We’ve seen a steady improvement in inflation,” says Angelo Kourkafas, an investment strategist at Edward Jones. He also observes a weaker labour market, including increased unemployment claims, decreased hours worked, and less demand for temporary payrolls.
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, also advocates for a wait-and-see approach, as the full impact of the Fed’s past tightening may still be on the way.
Kourkafas points out that the Fed can always tighten the monetary policy later. However, he believes that a new economic cycle isn’t necessarily on the horizon, and pulling could lead to slower growth.
“It’s not going to be a severe or long-lasting downturn, but as pandemic effects recede, like cumulative savings and pent-up demand, this could imply lower consumer spending and slower economic growth,” Kourkafas concludes.
The Federal Reserve’s decision to pause the interest rate hikes shows a nuanced response to fluctuating economic indicators. While inflation appears to be downward, the rate is still above the Fed’s target, prompting mixed views on future rate hikes. These opposing views reflect the complex balance the Fed must maintain between promoting economic growth and keeping inflation in check. Whether the Fed will resume its rate hikes or continue the pause remains to be seen, making the future actions of the Federal Reserve a significant focal point for economists and investors.
