Federal Reserve pauses interest rate rise campaign as US inflation subsides
The US Federal Reserve today held off on firing interest rates higher for the first time in over a year, electing to wait and see what impact prior increases have had on the world’s largest economy before straining households and businesses further.
Chair Jerome Powell and the rest of the Federal Open Market Committee (FOMC) – the group of people who set official interest rates in the US – kept borrowing costs unchanged at a range of five per cent and 5.25 per cent.
Fed officials’ decision to take their foot off the brake was charged by stateside inflation falling rapidly from its peak of just over nine per cent to four per cent.
Core inflation remains a concern, which the FOMC said could lure it back into rate rises in the summer if it persists.
“The committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee’s goals,” it said in its latest policy statement.
FOMC officials’ average expectations of where rates will hit by the end of the year – known as the “dot plot” – climbed 50 basis points to 5.6 per cent.
Wall Street whipsawed on the news, initially dropping sharply, but then rising during Chair Powell’s press conference.
“Nearly all” officials “expect that it’ll be appropriate to raise interest rates somewhat further by the end of the year, but at this meeting, considering how far and how fast we’ve moved, we judged it prudent to pause to assess additional information,” Chair Powell said.
He added July was a “live” meeting.
Analysts said there’s a chance the Fed may be done with bumping rates if inflation keeps falling.
“We think that weaker activity and employment, together with more encouraging signs that core inflation is moderating, will ultimately persuade the Fed that is doesn’t need a final hike in September,” Paul Ashworth, chief north America economist at Capital Economics, said.
Surveys of late have shown the US economy is still running fairly hot despite the Fed raising rates 10 times in a row starting in March 2022, including several outsized 75 basis point increases, which could have convinced the FOMC to opt for another jump.
However, Powell and co seemingly focused more on avoiding putting more pressure than is necessary on families and firms to bring inflation back down to their two per cent target.
The world’s most influential central bank is trying to get rid of price pressures without steering the economy into a recession, known as a “soft-landing”.
Today’s rate hold stands in stark contrast to where the Bank of England is tipped to send borrowing costs in the coming months.
A string of data recently has revealed inflation is proving much harder to tackle in Britain compared to the rest of the rich world.
Prices rose 8.7 per cent over the year to April, a smaller drop from March’s 10.1 per cent increase expected by the Bank and City. Core inflation rose to 6.8 per cent.
Gross domestic product figures out today from the Office for National Statistics showed the economy grew 0.2 per cent over the month to April, meaning Britain is still swerving the much-tipped recession.
Those figures have pushed financial market expectations of peak UK interest rates to just under six per cent from 5.5 per cent last week. That would mean a further five rate increases this year at least.
European Central Bank officials tomorrow are expected to conclude their rate hike cycle with a final 25 basis point increase to 3.5 per cent.