By Christopher Rugaber | The Associated Press
The Federal Reserve Keeps Rates Unchanged, Plans for One More Hike this Year
The Federal Reserve opted to maintain its key interest rate at the current level in its recent meeting, signaling a shift in its battle against inflation as price pressures ease. However, Fed officials indicated that they anticipate raising rates once more before the end of the year.
The decision to hold the benchmark rate around 5.4% suggests that the Fed believes it has enough time to evaluate whether the 11 rate hikes implemented since March 2022 will effectively cool down rising prices.
Related: Gas prices hit 2023 highs as Russia, Saudi Arabia cut oil supply
Although consumer inflation has dropped from its peak of 9.1% in June 2022 to 3.7% last month, it remains significantly above the Fed’s target of 2%. Policymakers emphasized that they are far from declaring victory over the most severe inflationary period in four decades.
In addition to indicating another rate hike before the year ends, their projections indicate that they plan to maintain elevated rates until deep into 2024. They now expect to reduce interest rates only twice in 2024, a decrease from the four rate cuts projected back in June.
This inclination to keep rates high for an extended period reflects concerns that inflation may not be decreasing rapidly enough to reach the 2% target.
Related: Tips for inflation-bitten budgets to conquer mortgage payment struggles
The Fed’s interest rate hikes have significantly raised the cost of consumer and business loans. By adjusting its interest rate policies, the central bank aims to guide the U.S. economy towards a precarious “soft landing” to cool down inflation without triggering a severe recession.
Despite the significant slowdown in inflation, the job market and the economy have remained resilient, defying expectations that the series of rate hikes by the Fed would result in widespread layoffs and a recession.
The Fed’s current approach to rate increases reflects the officials’ growing awareness of the risks associated with raising rates too high. Previously, their focus was primarily on the risks of not taking enough action to curb inflation.
The Fed’s recent actions underscore its intention to keep rates at or near their high level for an extended period, even as they approach the peak of their rate hikes.
By implementing higher interest rates across the economy, the Fed aims to reduce borrowing for various purposes such as housing, transportation, home renovations, and business investments, in order to moderate spending, control the pace of growth, and curb inflation.
Although there has been progress in combating inflation, gas prices have increased once again, reaching a national average of $3.88 per gallon as of Tuesday. In addition, oil prices have surged over 12% in the past month.
The economy continues to expand at a solid pace as Americans, buoyed by steady job growth and wage increases, continue to spend. These trends could potentially sustain higher inflation and interest rates, which may weaken household and corporate spending as well as the overall economy.
While overall inflation has declined, the prices of certain services, including auto insurance, car repairs, veterinary services, and hair salons, are still rising faster than pre-pandemic levels. However, the most recent data points in the direction the Fed wants to see: Inflation in June and July, excluding volatile food and energy prices, reached its lowest level in nearly two years.
Furthermore, signs have emerged indicating that the job market is not as robust as before, which helps to mitigate inflationary pressures. The pace of hiring has slowed down, and the number of unfilled job openings has decreased significantly in June and July. Simultaneously, more Americans have started seeking employment, bringing labor supply and demand into better balance and easing pressure on employers to raise wages, which could lead to price hikes to offset higher labor costs.
Moreover, next month, millions of Americans will be required to resume their student loan payments as the pandemic-era pause ends. This shift towards loan repayments could potentially weaken consumer spending, which serves as a driving force for the economy.
However, the path towards lower inflation has become more uncertain. In August, consumer prices rose by 0.6%, the largest increase in over a year. Compared to the previous year, prices have increased by 3.7% for the second consecutive month.
In addition, certain factors pose a threat to reignite inflation, weaken the economy, or both. Rising oil prices, for instance, are driving up gasoline costs steadily. If this trend continues, it could exacerbate inflation and leave consumers with less disposable income. Even the current limited strike by the United Auto Workers union against major U.S. automakers could potentially further inflate vehicle prices.
The Federal Reserve’s recent meeting takes place amidst a global trend of central banks raising rates in order to combat inflation. The pandemic disrupted global supply chains, causing shortages and price increases. Inflation worsened following Russia’s invasion of Ukraine in February 2022, which led to a spike in oil and commodity prices.
The European Central Bank recently raised its benchmark rate to 4%, the highest level since the establishment of the euro in 1999, although it indicated that this could be its final increase. The Bank of England is also expected to raise its rate in its upcoming meeting on Thursday. The Bank of Japan, which meets on Friday, is under less pressure to increase rates, but it has implemented measures to allow for a slight increase in Japanese long-term rates.
Denial of responsibility! Vigour Times is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
