The Federal Reserve (Fed) kept interest rates unchanged on Wednesday, While Fed’s chair Jerome Powell upgraded the current situation and future economic outlook.
The decision came amidst the uncertainty among policymakers, about whether the current financial conditions are tight enough to control inflation, or whether the economy needs more restraint.
Powell even said that the situation remains something like a riddle, with the central bank willing to raise interest rates again if their progress stalls. But, unsure about the pressure it would have on the economy.
In the press conference , Jerome Powell said that as of now it is better to maintain the Fed’s benchmark overnight rates at 5.25% – 5.5% range, given the uncertainties related to the economic pressures. To assess the impact of this decision, they will be keenly looking at the job and price data until the next meeting.
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The End of Rate Hikes?
It has been roughly 20 months since the Fed assumed its hawkish policy to fight inflation, still Powell thinks that it remains unclear whether the rates are repressing enough to keep the inflation at 2% target rate.
In the press briefing he said, “we’re not confident that we haven’t, or we have” reached that sufficiently restrictive plateau.”
He further added that, “Inflation has been coming down, but it’s still running well above our 2% target … A few months of good data are only the beginning of what it will take to build confidence.”
The Fed’s preferred economic measure, annual inflation, clocked at 3.4% in September for the third time in a row, excluding the energy and food costs, it was at 3.7%.
Focusing Market rates
When asked about the other market rates prevailing in the economy, Fed’s chair Powell mentioned acknowledged the fact that home mortgage rates, Treasury bond yields and other rates can have their impact on the economy. Adding that they will be closely looking at the situation and how these market rates affect the economic conditions.
Taking particular note of the 30-year fixed-rate home mortgages, Powell said that “these higher Treasury yields are showing through to higher borrowing costs for households and businesses. Those higher costs are going to weigh on economic activity to the extent this tightening persists.”
Powell’s comments explained the policy decision that is why Fed has decided to hold interest rates unchanged in the second consecutive meeting and upgraded the economic outlook. He also took note of the outpacing US GDP growing with an annual pace of 4.9% after an increase in consumer spending.
The U.S. central bank in its statement after the meeting said that, “economic activity expanded at a strong pace in the third quarter,” The language marked an upgrade to the “solid pace” of economic activity that the Federal Reserve discussed in the meeting.
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How Did Markets React?
US stock markets were seen in the positive zone after the announcement that “Fed kept rates unchanged, and Jerome Powell has upgraded the future economic outlook” started to ring up and down in the news.
The US stock market soared after the press briefing, rebounding after three months of losses. Dow climbed by 221 points or 0.7% and S&P 500 ended its session on a high of 1.1%, Nasdaq also surged by 1.6% during the trading on Wednesday.
Meanwhile, other markets plunged amidst the release of policy statements as Treasury bonds declined to 4.76%, as traders started betting that Fed is done with rate hikes and will start cutting it by June.
Though market sentiments says that Fed has completed with its rate hike cycle, the recent GDP data is pointing towards an unexpectedly stronger economy and labor market which could possibly force the central bank to increase rates once more.
As Powell mentioned during his press conference that, “it is still likely we will need to see some slower growth and some softening in the labor market to fully restore price stability.”
