The Federal Reserve has chosen to maintain the current interest rate, while also leaving the option open for a potential increase.
The Federal Reserve decided to maintain its primary short-term interest rate on Wednesday for the second consecutive time, but also indicated that it might consider raising the rate if inflation continues to increase in the upcoming months.
After its most recent meeting, the Fed announced that it would maintain its benchmark rate at approximately 5.4%, the highest it has been in 22 years. In an effort to combat inflation, the Fed began a series of significant rate increases in March 2022, but has since scaled back and has only raised rates once since May.
The most recent update mentioned that recent chaos in the stock market has caused longer-term interest rates to rise, reaching levels not seen in 16 years. This has also led to an increase in borrowing rates throughout the economy.
The report stated that stricter financial and credit requirements for individuals and companies are expected to have a negative impact on economic growth.
That reference echoed recent comments by Fed officials that higher yields — or interest rates — on the 10-year Treasury note could impose a dampening impact on the economy, cool inflation, and substitute for an additional rate hike by the Fed.
During a press briefing, Chairman Jerome Powell implied that the increase in extended interest rates could have a negative impact on the economy if they remain elevated for an extended period. However, he also warned that the Federal Reserve is not yet certain that their own standard rate is sufficient to effectively slow down the economy in the long run.
The interest rates for long-term Treasury bonds have significantly increased since July, which was the last time the Federal Reserve raised rates. This has resulted in higher costs for auto loans, credit card borrowing, and various types of business loans. Across the country, the average long-term fixed mortgage rate has risen to almost 8%, the highest it has been in 23 years.
Financial analysts at major banks on Wall Street have predicted that significant declines in the stock market and an increase in bond yields could negatively impact the economy to a similar degree as three or four quarter-point interest rate hikes by the Federal Reserve.
However, the stricter credit restrictions have not yet had a significant impact on the economy or employment, contrary to the Federal Reserve’s projections. Economic growth remained strong at an annual rate of 4.9% in the third quarter, fueled by strong consumer spending. Additionally, there was a notable increase in hiring in September.
The government announced on Wednesday that there were 9.6 million job openings posted by employers last month. This number is significantly lower than the peak in the beginning of last year, but it is still much higher than pre-pandemic levels.
Consumer inflation has dropped from a year-over-year peak of 9.1% in June 2022 to 3.7% last month. But recent data suggests that inflation remains persistently above the Fed’s 2% target.
Powell and other Federal Reserve officials have reacted to the unexpected signs of economic growth by stating that they will observe new data for any indications of inflation decreasing or persistently exceeding their desired level. Meanwhile, the majority of observers anticipate that the central bank will maintain current interest rates in December as well.
According to market experts, a variety of elements have come together to increase long-term Treasury rates and, together with the Federal Reserve’s short-term rate hikes, make borrowing more expensive for individuals and companies. One contributing factor is the anticipation of the government selling a significant amount of bonds in the future to cover large budget deficits, while the Fed is simultaneously reducing its bond holdings. Therefore, it may be necessary for Treasury rates to rise in order to attract more investors.
Due to the uncertain future trajectory of interest rates, investors are seeking higher returns to compensate for the increased risk of holding bonds with longer maturity dates.
The Federal Reserve’s main concern is that the 10-year Treasury yield is increasing without any rate hikes from the central bank. This indicates that Treasury yields may remain elevated even if the Fed maintains its benchmark rate, which could potentially limit economic growth and inflation.
Major central banks have been reducing their rate increases as their measures of inflation have shown signs of improvement. Last week, the European Central Bank maintained its standard rate, while inflation in the 20 countries using the euro dropped to 2.9% last month, the lowest it has been in over two years.
In September, the Bank of England maintained its key interest rate. On the other hand, the Bank of Japan is gradually moving towards raising borrowing costs by loosening its grip on longer-term rates.