2023-11-01 12:15:24
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The US Federal Reserve is set on Wednesday to hold interest rates at a 22-year high and keep open the possibility of additional monetary tightening in case its fight against inflation stalls.
The meeting would be the second in a row at which the Fed opts not to increase interest rates, as officials seek more clarity on whether they have sufficiently restrained economic activity 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.
The decision by the Federal Open Market Committee, to be announced at 2pm Eastern Time, comes at a delicate moment for global financial markets and the US economy.
While analysts widely expect the Fed to keep rates on hold, the war in the Middle East, warnings of renewed oil price volatility and a recent bond market sell-off have all complicated the outlook.
Fed chair Jay Powell on Wednesday is expected to keep the door ajar to additional tightening. In comments last month he said the “range of uncertainties” now complicated the Fed’s task of balancing the risk of doing too much — in terms of raising rates — against that of doing too little.
Powell and other Fed officials have said further action could be warranted if there is new evidence that economic growth is not slowing enough, or that the fall in inflation has stalled.
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. Analysts as well as Fed officials believe that shift, which increases borrowing costs, will aid the central bank’s efforts to damp demand.
Many traders in fed funds futures markets assume the central bank has finished raising rates and will be keeping them on hold until around 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 longstanding 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.
Data released on Tuesday showed that US wage growth remains high and there are also pressures in the services sector.
Some economists are also concerned about the impact of the Israel-Hamas war. Global oil prices remain historically high, despite a sell-off in recent days. The World Bank warned this week that a prolonged conflict could push crude prices beyond $150 a barrel. Food prices are also susceptible to destabilising increases, the multilateral lender said.
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