The US Federal Reserve (Fed) kept interest rates unchanged in the range of 5.25% to 5.50% for the second day in a row on Wednesday, underscoring the strength of the economy but still “very alert” to inflation risks.
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This is the third time in the last four meetings that the Fed has not changed its interest rates. It wants to avoid a too sharp slowdown in economic activity so as not to trigger a recession.
This means that the key interest rate remains at its highest level in more than 20 years. This makes loans more expensive for households and companies in the hope of slowing consumption and investment and reducing price pressure.
Inflation, the Federal Reserve’s main battle, “remains well above” the 2.0 percent target and it will take time to sustainably get it back on track, its President Jerome Powell warned during a conference. Press release on Wednesday following the meeting.
According to the Fed’s favored PCE index, it stabilized at an annual rate of 3.4% in September.
Jerome Powell did not rule out the possibility of another hike at the next meeting, but noted that no decision had been made at this point.
But “the full impact” of the eleven tariff increases implemented since March 2022 “has yet to be felt,” which could take a long time, he emphasized.
Unconvincing
Especially since the rise in long-term bond interest rates, if “sustained,” could have an impact on the Fed’s monetary policy, he warned.
Following this status quo on interest rates, Wall Street closed significantly higher on Wednesday.
Jerome Powell “tried to leave an option (of a rate hike) open, but he didn’t seem very convincing,” pointed out Edward Moya, an analyst at Oanda.
“It is clear that the Fed does not know when we will feel the full impact of its tightening cycle,” he added.
The Fed President, however, assured that the institution is “not at all” thinking about lowering its interest rates at this point.
The American economy is actually much stronger than expected, he continued.
Growth jumped in the third quarter, doubling to 4.9% annually.
At the same time, unemployment remains low at 3.8% in September and there are persistent labor shortages in several key sectors. The figures for October will be published on Friday.
The labor market, which has faced significant labor shortages for more than two years, has recently seen an influx of new workers “due to both (increased) labor force participation and immigration,” explained Jerome Powell.
This labor contribution represents “a significant gain” and “really helps the economy.” This partly explains why GDP (gross domestic product) is so high,” he added.
Clouds
But even though the American economy appears stronger than ever, even though a slight recession was expected at the beginning of the year, there are clouds on the horizon, both nationally and globally.
The war between Israel and Hamas, which began on October 7, could actually lead to a rise in oil prices, especially if it spread to other countries in the region.
The World Bank estimated Monday that in the event of a widespread conflict in the Middle East, oil prices could exceed $155, an unprecedented level.
Such an increase in energy prices would directly lead to an increase in raw material prices, with the risk that inflation would ultimately rise again.
And at the national level, in the United States, the election of a “speaker” in the House of Representatives, Mike Johnson, allows, after a three-week delay within the Republican Party, to consider a vote on the 2024 federal budget.
But it’s a safe bet that the standoff between Republicans and Democrats will begin again as the federal deficit skyrockets. There are only two weeks left to reach an agreement and prevent the state from being paralyzed.