The US Federal Reserve is signaling that it may have reached the end of its steep series of price increases. It left the key interest rate unchanged for the second decision in a row. Federal Reserve Chairman Jerome Powell reiterated that further increases were possible in order to tame the continued high inflation. But at the same time he said that the risk of tightening monetary policy too much is gradually becoming as high as doing too little. In the past year and a half, people have only been concerned that interest rates are not being raised quickly enough.
The key interest rate therefore remains in the range of 5.25 to 5.5 percent – the highest level in more than 20 years. At the same time, Powell emphasized that the question of interest rate cuts does not currently arise. The Federal Reserve is wondering whether it should increase further. However, nothing has been decided yet on future interest rate steps. Powell pointed out that there would be new data on the labor market and inflation by then.
The Federal Reserve (Fed) raised the key interest rate eleven times in 16 months in the fight against high inflation – most recently by 0.25 percentage points in July. It is one of the fastest and sharpest interest rate hikes in its history.
The central bankers then took a break in September – just as they had done in June. Wednesday’s decision marks the first time since the beginning of last year that the Fed has left the key interest rate unchanged at two meetings in a row.
Balancing the risk of inflation and a slowdown in the economy
When making decisions, the Federal Reserve weighs up the risk of inflation and the risk of the economy slowing too much. 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.
Since March 2022, the Fed has raised the key interest rate by more than five percentage points. The rapid inflation was triggered, among other things, by the rise in energy prices after the Russian attack on Ukraine. Powell reiterated that it remains a central goal of the Fed to bring inflation to the two percent mark in the long term. High inflation erodes purchasing power and hurts consumers, he said.
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. Powell called the U.S. economy “surprisingly robust.” The fact that progress has been made in the fight against inflation without the increase in unemployment that is typical of interest rate hikes is a “historically unusual result.”
GDP rose by 4.9 percent in the summer
The economy’s recovery from the coronavirus pandemic has brought new factors into play, making this economic cycle unique, Powell said. People continue to spend money, he emphasized. Many new jobs have been created, disposable income has increased, which also increases spending, which finances additional jobs.
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 is whether the Fed considers further interest rate hikes to be necessary later. In September she had targeted a further increase for this year, but Powell has now left that open.
Recently, defaults in servicing loans have 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.
