Fed leaves rates on hold – but signals rates could stay higher for longer
The Federal Reserve has left interest rates unchanged, as fears of a resurgence in inflation were not enough to force rate-setters into a further hike.
The Federal Open Market Committee’s (FOMC) decision means that the federal funds rate remains at a range of 5.25 per cent and 5.5 per cent, its highest level for 22 years.
However the FOMC did say it remained “highly attentive to inflation risks,” implying it will be some time before rates slip.
Although markets had expected the decision, signs of a rise in inflation had raised the chance that the FOMC might opt for a further 25 basis point hike.
The rate of inflation in August climbed to 3.7 per cent, up from 3.2 per cent in July. The increase, which was the fastest pace in over a year. Core inflation meanwhile rose at 0.3 per cent, which was more than economists had expected.
Like central banks all over the world, the Fed has been engaged in a 18-month battle against a surge in inflation. Having peaked at over nine per cent in June last year, inflation has fallen to below August’s 3.7 per cent level under the weight of the Fed’s tightening campaign.
Despite the hikes, the US economy has performed more resiliently than many economists had predicted. On an annualised basis, the US economy grew at 2.1 per cent in the second quarter.
This has raised question marks about whether the 11 rate hikes undertaken since March last year have had the decisive impact in slowing the economy that policymakers are looking for.
More recent data however has pointed to a loosening in the labour market. Unemployment climbed to 3.8 per cent in August, up from 3.5 per cent in July. Figures also showed that over 100,000 fewer jobs were created in June and July than were previously thought.