Federal Reserve Holds Interest Rates Steady as it Continues to Assess Economic Landscape

The Federal Reserve decided to avoid hiking interest rates as the central bank continues to evaluate its next steps amid the persistent bout of inflation.

After a two-day meeting of its Federal Open Market Committee (FOMC) in Washington, D.C., the central bank announced it will keep its rate target at 5.25% to 5.50%. The move was expected, and although the Fed paused this time, it may raise rates again before the completion of the tightening cycle.

Still, the current rate target continues at the highest since 2006, at the outset of the global financial crisis.

“Since early last year, the FOMC has significantly tightened the stance of monetary policy,” said Chairman of the Fed Jerome Powell at a news conference following the decision. “Given how far we have come, along with the uncertainties and risks we face, the committee is proceeding carefully. We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.”

Investors saw more than a 99% chance the Fed would pause this time, according to futures contract prices for rates in the short-term market targeted by the Fed. Additionally, the Fed held rates steady during its meeting in September.

Inflation has proved stubborn for the Fed, which might mean the central banks must keep the target rate higher for longer or tighten it more. Now, the Fed is playing a wait-and-see game and holding rates steady to analyze how the labor market, inflation gauges, and gross domestic product growth react.

The goal of the Fed is for price growth to run at a stable 2% rate.

In the consumer price index for the year ending in September, inflation came in at 3.7%, matching the level it was the month prior. On a month-to-month basis, inflation rose 0.4%, or slightly higher than projected.

In the personal consumption expenditures price index, the Fed’s preferred gauge, inflation held steady at 3.4% for the year ending in September.

Inflation reports will determine future rate hikes

If future reports on inflation continue showing inflation trending upward, it will become more likely the central bank will again hike rates, something that could further throttle economic growth and could harm the labor market — or even knock the economy back into recession.

“They have got a tough decision to make,” said former GOP Ohio Senator Rob Portman ahead of the Fed decision. “Obviously, interest rates are already pinching the economy…I think it’s tough to raise rates again. On the other hand, inflation has not abated. We’ve still got wage inflation, which I think is driving a lot of this.”

Portman said from a policy standpoint, one thing legislators can do is show progress on fixing the deficit and federal debt. He said doing so would take additional pressure off inflation and on interest rates.

However, several signs suggest the economy is proving resilient.

Growth in the GDP accelerated to a 4.9% seasonally adjusted annual rate in the third quarter of this year, up from 2.1% the previous quarter, reported the Bureau of Economic Analysis. That was higher than economists expected, for a 4.2% increase.

Two back-to-back quarters of negative GDP growth typically are indicative of a recession. The fact that the GDP was positive in the first quarter and second quarter and has now boomed again in the third quarter is a positive sign for the economy in avoiding a recession.

Janet Yellen, Treasury Secretary, has echoed others in saying a “soft landing,” a scenario in which the Fed is able to tame inflation while preventing a recession, is more likely now than not.

“You know, what we have looks like a soft landing with very good outcomes for the U.S. economy,” said Yellen recently.

Despite the possibility of avoiding a significant hit to the GDP and labor market, the increased rates are already being felt by consumers.

High interest rates are making it increasingly difficult to take on and pay off credit card debt and making the terms for auto loans more costly. It has also destroyed housing affordability, causing soaring mortgage rates at a time when home prices remain high. The median sales price of a home has risen a whopping 31% since before the pandemic.

As of Wednesday, the average 30-year fixed-rate mortgage rate was 7.88%. Recently, mortgage rates peaked at over 8% for the first time since the turn of the century.