The Federal Reserve Maintains Key Rate, Considers Future Hike

The Federal Reserve (FED), in its recent monetary policy meeting, opted to maintain its key short-term interest rate unchanged for the second consecutive occasion. However, it articulated its readiness to consider further adjustments to interest rates in the event of escalating inflationary pressures in the ensuing months.

In its official statement following the meeting, the Federal Reserve affirmed its commitment to holding the benchmark rate at approximately 5.4%. Marking the highest level in 22 years. This position follows a series of assertive interest rate increases initiated in March 2022 to combat inflation. With only one rate adjustment implemented since May.

The central bank’s statement acknowledged the economy’s robust expansion during the July-September quarter, characterized by strong job creation. It reiterated its deliberation regarding future rate increases should prevailing circumstances warrant such measures. Nevertheless, it also acknowledged the recent turbulence in financial markets. That resulting in the 10-year Treasury note yields approaching nearly 16-year highs and contributing to elevated loan interest rates across the economic landscape. This phenomenon aligns with the Fed’s overarching goal of tempering economic growth and curtailing inflationary pressures.

Federal Reserve Chair Powell’s Remarks on Rate Adjustment Conclusion and Inflation

During a press briefing, Chair Jerome Powell intimated that the Federal Reserve might be approaching the conclusion of its interest rate adjustment campaign. Powell highlighted that the substantial increase in longer-term interest rates may serve to mitigate inflation without necessitating further interventions by the Fed. He also underscored the gradual decline in wage growth. Which has the potential to mitigate inflation, as companies may find it less imperative to raise prices in response to labor cost increments.

Powell expressed confidence that, notwithstanding indications of persistent inflation in recent monthly data, the inflationary trajectory remains downward while the economy continues its expansion. Powell stated, “The Good news is that we are making a progress here. Progress may be irregular and uneven, but it is discernible.”

Chair Powell indicated that the Federal Reserve’s policymakers recognize that the full repercussions of their rate adjustments have yet to manifest comprehensively in the economy, necessitating a need to gauge the implications over an extended period. This consideration underscores the Federal Reserve’s reluctance to precipitously implement rate hikes in the immediate future. Powell articulated that “slowing down” the rate adjustments is enhancing their comprehension of the extent of potential further action.

Federal Reserve Chair Hints at Conclusion of Interest Rate Adjustments

Following Powell’s commentary, equity prices rose, and bond yields declined. As investors interpreted his statements as indicative of a potential conclusion to the Federal Reserve’s rate adjustment initiatives. Nevertheless, it should be noted that the Federal Reserve has not categorically affirmed the cessation of rate hikes.

Michael Arone, Chief Investment Strategist at State Street Global Advisors, observed that hiring remains robust. Also inflation persists above the Federal Reserve’s 2% target, and the economy maintains a healthy pace of growth. Powell emphasized that the central bank’s certainty regarding the adequacy of its key interest rate to engender long-term economic moderation remains incomplete. Consequently, the Federal Reserve retains flexibility in its approach to forthcoming measures.

Powell conveyed that Federal Reserve officials remain uncertain about the imperative need for further rate hikes to combat inflation. Representing a divergence from their earlier posture this year, which leaned toward a proclivity for raising interest rates.

Also Read: USD/EUR Pair: Holding Steady Above 1.0550 Ahead of Fed Decision

Elevated Long-Term Treasury Yields and Economic Implications

Long-term Treasury yields have ascended since the Federal Reserve’s last interest rate adjustment in July. Leading to increased borrowing costs for auto loans, credit card borrowing, and a spectrum of business loans. On a national scale, the average long-term fixed mortgage rate is on the cusp of 8%. Which marking its highest point in 23 years.

Economists at prominent Wall Street financial institutions have postulated that the recent equity market losses and augmented bond yields could exert a dampening influence on the economy. Which tantamount to the impact of three or four quarter-point interest rate increases by the Federal Reserve. Nevertheless, these constricting credit conditions have not had the substantial cooling effect on economic growth. Also no effect on hiring as initially anticipated by the Federal Reserve. The economy exhibited robust growth at a rate of 4.9% annually in the July-September quarter. That was driven chiefly by vigorous consumer spending, with hiring remaining resilient in September.

Consumer inflation has receded from its peak of 9.1% on a year-over-year basis in June 2022 to 3.7% in the most recent month. Notwithstanding, recent data underscores the persistently elevated nature of inflation relative to the Federal Reserve’s target of 2%.

Market Response to Powell’s Remarks on Federal Reserve’s Rate Adjustments

Market analysts attribute the surge in long-term Treasury yields to an amalgamation of factors, combined with the Federal Reserve’s short-term interest rate adjustments, resulting in amplified borrowing expenses for both consumers and businesses. These factors encompass the anticipation of the government’s issuance of potentially trillions of dollars in bonds in the forthcoming years to finance substantial budget deficits, even as the Federal Reserve is divesting its holdings of bonds. Consequently, heightened Treasury rates may be requisite to attract a larger pool of investors. Furthermore, the vagueness surrounding the future trajectory of interest rates has led investors to demand greater yields to offset the augmented risk associated with holding longer-term bonds.

Global Central Banks and Persistent 10-Year Treasury Yield Rise

Of paramount importance to the Federal Reserve is the enduring escalation in the yield of the 10-year Treasury. Even in the absence of any adjustments to the central bank’s interest rates. This phenomenon indicates that Treasury yields may remain elevated. Although the Federal Reserve’s decision to maintain its own benchmark rate at its present level. This, in turn, is expected to contribute to the containment of both economic expansion and inflationary pressures.

Notably, other prominent central banks have also been in the process of moderating their interest rate policies. Owing to observed enhancements in their respective inflation metrics. For example, the European Central Bank recently opted to leave its benchmark rate unaltered, while inflation in the 20 eurozone nations receded to 2.9% last month, marking its lowest point in over two years.

In a similar vein, the Bank of England maintained its key interest rate without alterations in September, while the Bank of Japan is gradually advancing toward a higher cost of borrowing by relaxing its control over longer-term interest rates.

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Disclaimer:

Please note that this article serves solely for informational purposes. As such, it is not financial advice. We strongly advise readers to conduct thorough research and consult with financial professionals before making any investment decisions.