The Federal Reserve decided again to refrain from hiking interest rates as the central bank evaluates its next steps amid this persistent bout of 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 rate target at 5.25% to 5.50%. The move was expected, and while the Fed paused this time around, there is a chance that it will raise rates again before its tightening cycle is complete.
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Still, the current rate target is still the highest it has been since 2006, at the outset of the global financial crisis.
Investors saw a greater than 99% chance the Fed would pause this time, according to futures contract prices for rates in the short-term market targeted by the Fed. The Fed also held rates steady during its September meeting.
Inflation is proving a bit stubborn for the Fed, which might mean that the central bank will have to end up keeping the target rate high for longer, or perhaps tighten a bit more. Right now, the Fed is playing a game of wait-and-see and is holding rates steady in order to analyze how the labor market, gross domestic product growth, and inflation gauges react.
The Fed’s goal is for price growth to run at a stable 2% rate.
Inflation in the consumer price index for the year ending in September came in at 3.7%, matching the level it was the month before. On a month-to-month basis, inflation rose 0.4%, slightly higher than projected.
In the Fed’s preferred gauge, the personal consumption expenditures price index, inflation also held steady at 3.4% for the year ending in September.
If future inflation reports keep showing inflation trending upward, it will become more likely that the central bank will hike rates again, something that could further throttle economic growth and could harm the labor market — or even knock the economy into a recession.
“They have got a tough decision to make,” former Republican Ohio Sen. Rob Portman told the Washington Examiner in an interview ahead of the Fed decision. “Obviously, interest rates are already pinching the economy … I think it’s tough to raise rates again. On the other hand, inflation has not abated. We’ve still got wage inflation, which I think is driving a lot of this.”
Portman said that from a policy standpoint, one thing that lawmakers can do is show progress on fixing the federal debt and deficit. He said doing so would take some pressure off inflation and on interest rates.
But a number of signs suggest that the economy is proving resilient.
GDP growth accelerated to a 4.9% seasonally adjusted annual rate in the third quarter of this year, up from 2.1% the quarter before, the Bureau of Economic Analysis reported. That was above the expectations of economists for a 4.2% increase.
Typically, two back-to-back quarters of negative GDP growth are indicative of a recession. The fact that the GDP was positive in the first quarter, the second quarter, and now boomed again in the third quarter bodes well for the economy in avoiding a recession.
Treasury Secretary Janet Yellen has echoed others in saying that a “soft landing,” a scenario in which the Fed is able to tame inflation while preventing a recession, is now more likely than not.
“You know, what we have looks like a soft landing with very good outcomes for the U.S. economy,” Yellen recently told Bloomberg.
Still, despite the possibility of avoiding a major hit to GDP and the labor market, the higher rates are already being felt by consumers.
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High interest rates are making it more difficult to take on and pay off credit card debt and making the terms for auto loans more expensive. It has also smashed housing affordability, causing mortgage rates to soar at a time when home prices are already way up (the median sales price of a home has increased a whopping 31% since just before the pandemic).
As of Wednesday, the average rate on a 30-year fixed-rate mortgage was 7.88%, according to Mortgage News Daily, which tracks daily changes in rates. Recently, mortgage rates peaked at over 8% for the first time since the turn of the century.