US Federal Reserve leaves key interest rate unchanged, sees hike by year-end
New Delhi, Sep 21, 2023
The Federal Reserve on Wednesday announced that it is keeping its primary interest rate of 5.25%-5.5% unchanged as it endeavors to steer the US economy toward a "gentle landing", where inflation cools down without inducing a severe recession.
Chair Jerome Powell and fellow Federal Reserve officials have made it evident that they are leaning towards adopting a more gradual and cautious approach in pursuing their target of achieving an annual inflation rate of 2%.
"The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-25% to 5.5%," the Federal Reserve said in its monetary policy statement.
"The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans," it added.
Rate hike later in the year
Committee members hinted that another quarter-point rate hike might be needed before the end of this year, according to the economic projections released along with their monetary policy statement.
The Fed has rate-setting meetings scheduled in November and December.
Contemplative strategy
This more contemplative strategy follows the series of 11 interest rate hikes initiated in March 2022, which significantly elevated borrowing expenses for both consumers and businesses.
By executing the fastest short-term interest rate hikes in four decades, the Federal Reserve aimed to curtail borrowing and spending, slow down the economy, and rein in inflation. To date, consumer inflation, measured on a year-over-year basis, has descended from its peak of 9.1% in June of the previous year to 3.7% in August. However, it still exceeds the Federal Reserve's target.
Powell and other central bank officials have emphasized that, although progress is being made, they have not yet completed their mission. Despite the overall decline in inflation, the costs of various services, ranging from auto insurance and car repairs to veterinary services and hair salons, are increasing at a faster rate than before the pandemic.
The Federal Reserve Bank's decision comes amid a global backdrop where central banks are primarily raising interest rates to combat inflation.
Prices surged after disruptions in global supply chains caused by the pandemic led to shortages and increased prices. Inflation escalated further following Russia's invasion of Ukraine in February 2022, which led to soaring oil and commodity prices.
The European Central Bank raised its benchmark rate last week for the tenth time to 4%, marking its highest level since the establishment of the euro in 1999, though it indicated that this might be its final increase.
The Bank of England is also expected to raise its rate when it convenes on Thursday.
Meanwhile, the Bank of Japan, which meets on Friday, is under less pressure to hike rates, though it has taken measures to permit Japanese long-term rates to edge upwards.
[The Times of India]
