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The US Federal Reserve held interest rates at a 22-year high on Wednesday but kept open the possibility of further monetary tightening amid mounting evidence that the US economy remained strong.
The meeting was the second in a row at which the Federal Open Market Committee opted not to increase interest rates, as officials seek more clarity on whether monetary policy is already tight enough to curb inflation. After 11 increases since March 2022, the benchmark federal funds rate is now between 5.25 per cent and 5.5 per cent.
Strong economic data, including a robust labour market and consumer spending that drove faster than expected gross domestic product growth in the third quarter, may have left the central bank with more work to do to meet its inflation target, Fed chair Jay Powell indicated after the meeting.
“We are committed to achieving a stance of monetary policy that is sufficiently restrictive to bring down inflation to 2 per cent over time and we’re not confident yet that we have achieved such a stance,” he said.
But the central bank could afford to proceed “carefully” with future decisions, Powell said, amid signs that past rate rises were having an effect on the economy.
The unanimous FOMC decision comes at a delicate moment for global markets.
Financial conditions, including companies’ costs of borrowing money, have tightened since the Fed’s last meeting in September, with long-dated Treasury yields reaching multiyear highs, roiling global markets at a time of rising geopolitical tensions.
“Given the robustness of the data on growth and inflation, Powell could have been a lot more hawkish,” said Gargi Chaudhuri at BlackRock. “But he wasn’t — he was much more balanced.”
Powell said that it was “too early” to determine whether the rise in yields would last, even as the Fed acknowledged in its statement that tighter financial and credit conditions could begin to bite. “We just don’t know how persistent this will be,” he added, referring to the jump in yields.
But he said the move in bond markets would not affect the central bank’s strategy to continue shrinking the size of its balance sheet, by allowing maturing securities to roll off.
“It’s not something we’re talking about or considering,” Powell said.
US stocks rose as the Fed chair spoke, with the S&P up 1.1 per cent on the day and the Nasdaq Composite rising 1.6 per cent.
The two-year Treasury yield, which moves with interest rate expectations, fell to 4.94 per cent, its lowest level in three weeks. The 10-year yield, which moves with growth and inflation expectations, hit its lowest level in two weeks, at 4.76 per cent. Traders also cut their bets on a rate rise in December.
While some market participants expect the Fed to begin lowering rates next year, Powell said policymakers were not yet considering such a move.
“The committee is not thinking about rate cuts right now at all,” he said.
The meeting came against a backdrop of persistent strength in the US economy, with consumer spending remaining high and unemployment historically low.
In his opening remarks on Wednesday, Powell said US activity had expanded at a “strong pace and well above earlier expectations”. The Fed also noted that jobs gains remained healthy despite some moderation in the monthly pace.
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 it 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 are aware that some price pressures remain difficult to root out or are starting to resurface.
Figures published on Wednesday showed that the labour market remains strong, with the number of job vacancies above expectations, while data earlier in the week indicated that wage growth remains high. However, activity in the manufacturing sector shrank more than forecast.
“I think if the Fed stays on pause, that could leave enough space for the economy to reaccelerate,” said Darrell Spence, an economist at Capital Group.