The Federal Reserve held interest rates at a 22-year high on Wednesday but kept open the possibility of additional monetary tightening amid mounting evidence the US economy remains strong.
The meeting is the second in a row at which the Federal Open Market Committee opted not to increase interest rates, as officials seek more clarity on whether they have sufficiently restrained consumer and business demand to bring inflation under control. After 11 increases since March 2022, the benchmark federal funds rate is now between 5.25 and 5.5 per cent.
In a statement on Wednesday, the Fed upgraded its assessment of the world’s largest economy, saying that activity had expanded at a “strong pace”, compared with the “solid” clip it described in September.
The Fed also acknowledged that jobs gains remain healthy despite some moderation in the monthly pace. However, in recognition of the recent rise in long-term bond yields, the central bank warned that tighter financial and credit conditions were likely to bite.
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It reiterated that it would factor in those developments, as well as the effects of its previous rate rises, when deciding whether more monetary tightening was needed.
Immediately following the announcement, the two-year Treasury yield, which moves with interest rate expectations, dropped to 4.98 per cent, its lowest level in nearly three weeks. The 10-year yield, which moves with growth and inflation expectations, briefly dipped before recovering.
The FOMC decision, which had unanimous support, comes at a delicate moment for global financial markets.
Financial conditions, including companies’ costs of borrowing money, have tightened since the Fed’s last meeting in September, when officials emphasised there would be little let-up in interest rates in coming years.
Long-dated Treasury yields have reached multiyear highs, roiling global markets at a time when geopolitical tensions have intensified. An escalating war in the Middle East has renewed concerns about oil price volatility, adding to what Fed chair Jay Powell has described as a “range of uncertainties” that are complicating the central bank’s task of balancing the risk of doing too much in terms of tightening against that of doing too little.
Analysts as well as Fed officials believe that the recent rise in long-term interest rates will aid the central bank’s efforts to damp demand. Yields edged down on Wednesday as the Treasury adjusted its debt issuance plans.
That has helped to firm bets among traders in fed funds futures markets that the central bank has finished raising rates and will keep them on hold until about the middle of next year.
However, US economic demand has been far more resilient than expected, with consumer spending still high and unemployment historically low.
Some economists worry that the country’s economic strength could halt or slow the decline in inflation, making it harder to reach the Fed’s long-standing target of 2 per cent and potentially requiring the central bank to impose higher borrowing costs.
Broad inflation indices, including the consumer price index, have fallen well below June 2022′s peak of 9.1 per cent. September’s rate was 3.7 per cent. But officials remain aware that some price pressures remain difficult to root out or are starting to resurface.
Figures published on Wednesday showed that the labour market remains strong, with the number of job vacancies above expectations, while data earlier in the week indicated that wage growth is still high. However, activity in the manufacturing sector contracted more than forecast.
Despite a sell-off in recent days, global oil prices also remain historically high. The World Bank warned this week that a prolonged conflict could push crude prices beyond $150 a barrel. Food prices were also susceptible to destabilising increases, the multilateral lender said. – Copyright The Financial Times Limited 2023
