The US Federal Reserve may be on the verge of a rate pause after ten consecutive rate hikes. The Federal Reserve’s (Fed) decision on the future course of monetary policy will be announced today. Analysts assume that the central bank of the world’s largest economy will leave the key interest rate unchanged at a range of 5.0 to 5.25 percent. This is the highest value since 2007 – i.e. before the start of the global financial crisis.

The Fed should be given a tailwind by the new inflation data. Accordingly, the increase in consumer prices in the USA weakened noticeably in May. They rose by 4.0 percent compared to the same month last year. In the previous month, the rate was still 4.9 percent. The current rate is the lowest since March 2021. In the fight against high inflation, the central bank had opted for interest rate hikes of 0.75 percentage points, some of which were considerable. Recently, however, the Fed slowed down the pace significantly. It will also publish an updated economic forecast today.

Fed Chair Jerome Powell had already opened the door to a possible interest rate pause after the May meeting, but had not made a commitment. At the same time, he made it clear that interest rate cuts are not to be expected in the foreseeable future.

The new inflation data give hope

Keeping inflation in check is the traditional task of central banks. If interest rates rise, private individuals and the economy have to spend more on loans – or borrow less money. Growth is slowing, companies cannot pass on higher prices indefinitely – and ideally the inflation rate is falling. At the same time, there is a risk that the economy will stall.

The new inflation data give hope that the Fed’s strict interest rate policy is beginning to bear fruit. However, the inflation rate is still far from the Fed’s target of an average of 2 percent. Since the beginning of 2022, the Fed has been betting on rate hikes at a pace not seen in decades. However, this may not have had the full effect yet, as interest rate hikes only take effect with a time lag. A rate pause could now be an opportunity for the Fed to give itself some time to observe the lasting effects of tight monetary policy.

Powell had recently made it clear that the recent turbulence in the banking sector due to more cautious lending could have a similar effect to interest rate hikes. At the past few meetings, the central bankers also had to weigh up between calming the worried markets and fighting high consumer prices. Because the Fed’s aggressive interest rate hikes have triggered part of the banking turmoil. Stumbling smaller money house goods had collapsed in the past few months – also because they had not adequately prepared themselves for rising interest rates.