The US Federal Reserve has announced that it will maintain its interest rates, as much of Europe raises theirs.
ADVERTISEMENTThe US Federal Reserve has opted to maintain its benchmark interest rate, marking the second time in three meetings that it has chosen to keep rates unchanged.
The decision, announced following a meeting on Wednesday, hints at a shift in the Fed's stance as it gradually eases its battle against inflation amid signs of price pressures subsiding.
The Fed's policymakers also signalled that they expect to raise rates once more this year and envision their key rate staying higher in 2024 than most analysts had expected.
But as their latest policy meeting ended, the 19 members of the Fed's rate-setting committee conveyed growing optimism that they will manage to slow inflation to their 2% target without causing a deep recession.
Since peaking at a year-over-year high of 9.1% in June 2022, consumer inflation in the United States has dropped to 3.7%. The Fed’s latest decision kept its benchmark rate at about 5.4%, the result of the 11 rate increases it unleashed beginning in March 2022.
What is predicted for the future?
Fed officials expect to cut interest rates just twice next year, fewer than the four rate cuts they had forecast in June. They predict that their key short-term rate will still be 5.1% at the end of 2024 -- higher than it was from the 2008-2009 Great Recession until May of this year.
Yet one reason they likely have reduced the number of expected rate cuts for 2024 is a positive one: They think a recession, which would require multiple rate cuts to aid the economy, is less likely to occur.
The approach to rate increases the Fed is now taking reflects an awareness that the risks to the economy of raising rates too high is growing. Previously, the officials had focused more on the risks of not doing enough to slow inflation.
In generating sharply higher interest rates throughout the economy, the Fed has sought to slow borrowing -- for houses, cars, home renovations, business investment and the like -- to help ease spending, moderate the pace of growth and curb inflation.
Not out of the woods yet
Though clear progress on inflation has been achieved, gasoline prices have lurched higher again, reaching a national average of $3.88 (€3.64) a gallon as of Tuesday. Oil prices have surged more than 12% in just the past month.
While overall inflation has declined, the costs of some services -- from auto insurance and car repairs to veterinary services and hair salons -- are still climbing faster than they were before the pandemic. Still, most recent data is pointing in the direction the Fed wants to see.
Some factors are threatening to re-ignite inflation, weaken the economy, or both. Rising oil prices, for example, are making gasoline steadily more expensive. Should that trend continue, it would worsen inflation and leave consumers with less money to spend.
In Europe, a mixed approach
As the US has opted to maintain its interest rates, other European nations have raised them. Norway’s central bank has announced it will once again hike up its interest rate, up to 4.25% which is a 0.25% increase, the thirteenth time in two years that it has done so.
Similarly, the European Central Bank (ECB), Sweden and Denmark’s national banks have declared similar hikes in announcements made in the past week. Switzerland, however, has remained steadfast, freezing its policy rate at 1.75%.
The Bank of England is set to announce their decision when it comes to interest rates. Considering the UK’s small shrink in inflation in August there may still be room for surprises.
