US Fed set to hold rates

The U.S. economy, once a source of recession concerns, is now generating positive news, with strong economic growth, robust job creation, and consumers spending on various goods and services. This robust economic performance presents a challenge for the Federal Reserve as it considers whether to implement another interest rate hike.

Over the past year, the Federal Reserve has raised its benchmark interest rate at a pace not seen in more than two decades in an effort to combat rising inflation. The idea behind these rate hikes is to slow economic growth and reduce consumer demand, theoretically leading to an eventual economic cooldown. However, the economy has shown resilience and has not slowed down significantly.

Although inflation is currently lower than its peak of over 9% last year, it remains more than a percentage point above the central bank’s target rate. Economists widely expect the Federal Reserve to leave interest rates unchanged at its upcoming meeting, allowing the previous rate increases to have a greater impact and giving the central bank time to assess whether further hikes are necessary.

Investors and policymakers will closely scrutinise comments from Fed Chair Jerome Powell for insights into the central bank’s future path for the remainder of the year.

Recent economic data, including a robust GDP growth rate, a strong jobs report, and increased consumer spending, point to a resilient economy. Fed Chair Jerome Powell has acknowledged this strength, but he also highlighted the risk that such strong growth could jeopardise progress in controlling inflation.

Despite the strong economic indicators, concerns have emerged with the rapid rise in the 10-year Treasury yield, which has led to higher long-term borrowing costs for consumers seeking mortgages and businesses looking to expand. High mortgage rates have significantly slowed the housing market, and mortgage applications have reached their lowest level since 1996.

The Federal Reserve may interpret the increase in bond yields as a sign that previous rate hikes are taking effect in the economy, making additional rate hikes unnecessary, at least for the time being. However, the central bank’s projections at its September meeting indicated an expectation for one more rate hike this year.

The current benchmark interest rate is in the range of 5.25% to 5.5% as a result of a series of rate increases. Powell emphasised that the Federal Reserve would proceed with interest rate policy carefully, considering the uncertainties in the economic landscape. However, the central bank’s primary goal remains controlling and reducing inflation to normal levels.