The US dollar strengthens on higher US interest rates - Shutterstock
ALBAWABA – The United States (US) Federal Reserve (Fed) pinned the benchmark US interest rate again for November late Wednesday as higher long-term Treasury yields augment monetary policy measures intended to curb US inflation.
Also ReadUS inflation up in September as PCE, spending rises
However, Fed Chair Jerome Powell did leave the door open to more hikes if needed, according to Bloomberg, noting that the policymakers will be meeting again in December.
The benchmark US interest rate right now is at its highest level in 22 years.
Will the Fed cut US interest rates soon?
“It’s fair to say that’s the question we’re asking is ‘Should we hike more?’” he noted when asked whether policymakers still expected another US interest rate hike would be necessary this year.
In a statement carried by Agence France-Presse (AFP) Thursday, the Fed said the decision to keep its benchmark lending rate between 5.25 percent and 5.5 percent gives policymakers time.
It is essential to "assess additional information and its implications for monetary policy".
"The process of getting inflation sustainably down to two percent has a long way to go," Fed Powell said at a news conference.
He added that the Fed "is not thinking about rate cuts right now, at all."
Chief of the Federal Reserve Jerome Powell addressing a press conference on US interest rate decisions - Shutterstock
Since peaking at more than seven percent in June 2022, US inflation has slowed by more than half, but it remains stuck firmly above three percent.
After over a year of rate hikes, many analysts, including those employed by the Fed, predicted a recession in the US this year due to the rapid pace of these hikes.
Technically, when the Fed hikes US interest rates it raises the cost of borrowing from the bank, which normally dampens economic activity and weakens the labor market. But so far, none of these signs have manifested.
In fact, despite its aggressive monetary tightening, the Fed noted that "economic activity expanded at a strong pace in the third quarter," according to AFP.
"Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low," the Fed statement added.
Therefore, even though US inflation is in fact down significantly, strong economic activity persists.
Then why pin US interest rates?
Despite the strong economic data, the Fed's decision to pin the US interest rate was made easier by a surge in yields on longer-term government bonds.
The Fed's key short-term rate mainly affects the borrowing rates offered by banks. But Treasury yields determine "everything from mortgage rates to corporate and municipal bond yields," KPMG chief economist Diane Swonk wrote in a recent note to clients, reported by AFP.
The Fed is "attentive to the increase in longer-term yields, which have contributed to a tightening of broader financial conditions since the summer," Powell said Wednesday.
The Fed’s policy-setting Federal Open Market Committee said in a post-meeting statement that “tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation,” as reported by Bloomberg.
“The extent of these effects remains uncertain,” the Fed said.
Meanwhile, the S&P 500 index and Treasuries extended their rally while the dollar slipped after the announcement. Traders also marked down the chances of another hike over the coming months, according to Bloomberg.
Higher US interest rates strengthen the US dollar - Shutterstock
In his press conference, Powell said financial conditions have “tightened significantly in recent months driven by higher, longer-term bond yields, among other factors.”
The Fed chief said previous rate hikes were putting downward pressure on economic activity and inflation, and the full effects of tightening had yet to be felt.
The US economy expanded at a 4.9% annualized rate last quarter, as reported by Bloomberg. In the meantime, a measure of underlying inflation that’s closely watched by Fed officials also accelerated to a four-month high in September and job gains blew past expectations.
Policymakers will get another update on the employment market on Friday, when the Labor Department releases the jobs report for October.
Also ReadEurozone, UK inflation cooling in October
Whether that economic strength persists or slows down is one of the biggest questions facing policymakers. The outcome has the potential to shape the direction of inflation and US interest rates.
