WASHINGTON: The Federal Reserve will likely announce it is holding interest rates at a 22-year high on Wednesday (Nov 1), as it looks to tackle inflation without damaging the resilient US economy.
Analysts and traders parsing recent Fed speeches overwhelmingly expect the US central bank to hold rates steady for the second meeting in a row as it looks to return inflation to its long-term target of 2 per cent.
“Fed commentary has all but confirmed that the Fed will stay on hold in November,” Bank of America economists wrote in a recent note to clients.
Interest rate hikes slow down inflation by raising the cost of borrowing from the bank, which dampens economic activity and weakens the labour market.
Since peaking at more than 7 per cent in June last year, inflation – as measured by the Fed’s favoured yardstick – has fallen by more than half, although it remains stuck firmly above 3 per cent.
Futures traders assign a probability of 99.9 per cent that the Fed will vote to hold rates steady in November, according to CME Group data.
RESILIENT ECONOMY
In a surprising development for many analysts, the Fed’s aggressive interest rate policy has not pushed the world’s largest economy into a recession, and it looks unlikely to do so in the coming months.
In fact, resilient consumer spending fueled higher-than-expected annualised growth of 4.9 per cent in the third quarter, building on positive growth in the first half of the year.
At the same time, hiring has picked up and unemployment remains close to historic lows.
“I always say it is a mistake to bet against the American people,” President Joe Biden said in a statement on Thursday, shortly after the latest GDP figures were released.
“I never believed we would need a recession to bring inflation down – and today we saw again that the American economy continues to grow even as inflation has come down,” he added.
Another factor weighing on the Fed as it mulls whether to hold its key short-term lending rate steady has been the recent surge in yields on longer-term government bonds.
Whereas the Fed’s key short-term rate mainly affects the borrowing rates offered by banks, Treasury yields determine “everything from mortgage rates to corporate and municipal bond yields”, KPMG chief economist Diane Swonk wrote in a recent note to clients.
“It has already added an Arctic blast to the mortgage winter, which has frozen current owners in place and locked first-time buyers out of the housing market,” she said.
“Many within the Fed believe that the rise in yields we have seen is equivalent to an additional rate hike,” she added.
Source: CNA
