The Federal Reserve said Wednesday that it would hold interest rates steady as it evaluates its next steps amid a recent uptick in inflation.
Following a two-day meeting of its Federal Open Market Committee in Washington, D.C., the central bank announced that it will keep its interest rate target at 5.25% to 5.50%. The move was expected, and investors had anticipated that it might raise rates again later this year.
Still, the current rate target is still the highest it has been since 2006, before the global financial crisis.
Investors saw a 99% chance that the Fed would pause this time around, according to futures contract prices for rates in the short-term market targeted by the notoriously predictable Fed.
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Back-to-back months of inflation reports show that price growth is starting to tick back up a bit even after more than a year of, at times very aggressive, tightening by the Fed.
The consumer price index rose to 3.7% in August from a low of 3% in June, and inflation as measured by the producer price index ticked up to 1.6% for the year ending in August, the second such month of increases for the indices.
If future inflation reports keep showing inflation trending back upward, it will become more likely that the central bank hikes rates again, something that would further throttle economic growth and could harm the labor market — or even knock the economy into a recession.
The labor market has remained robust so far, though has shown some signs of slowing in recent months.
While the economy beat expectations in August and added 187,000 jobs, the unemployment rate ticked up to 3.8%, up from the 3.5% level it has hovered around for months now.
A major factor in the inflation surge is higher oil and gas prices, which have gone up in recent weeks, causing pain for consumers. The national average for regular formulation gasoline is approaching $3.90, the highest seasonal level in more than a decade.
But the higher energy costs don’t just make it more expensive for consumers to fill up their cars — they could feed into increases in the prices of other goods and services as companies are forced to raise prices in order to make up for the extra spending on energy costs.
The recent gains in inflation are also a blow to President Joe Biden, whose White House has been trying to tout so-called “Bidenomics.” The push included highlighting declines in inflation and labor market gains. Two months of inflation increases has made the messaging more difficult for the president.
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Still, one key positive element in the economy is the country’s gross domestic product growth, which has proven surprisingly durable in the face of the Fed’s tightening.
GDP grew at a 2.1% annual rate in the second quarter of this year after a 2% rate in the first quarter of this year. Furthermore, the Atlanta Federal Reserve’s “GDPNow” tracker predicts the third quarter GDP growth rate will be 4.9%.