Fed presses PAUSE on interest rate hikes after ten consecutive increases – as inflation cools

The Federal Reserve suspended interest rate hikes for the first time in 15 months to allow time to assess the impact of its aggressive drive to rein in inflation.

During the June policy announcement, the Fed said it would keep rates between 5 and 5.25%, after ten consecutive hikes since March 2022 that have seen mortgages and borrowing costs soar.

But in a surprise move, he signaled he could raise rates twice more this year.

The central bank’s 18 policymakers plan to raise its key rate an additional half a point this year, to around 5.6%, according to economic forecasts released alongside the rate decision.

It comes after the latest statistics from the US Department of Labor showed inflation fell to an annual rate of 4%, the lowest pace of price increases since March 2021.

Speaking after the announcement, Fed Chairman Jerome Powell said they had “covered a lot of ground and the full effects of our tightening have yet to be felt.”

Federal Reserve Chairman Jerome Powell spoke to the press after the announcement

The decision to leave the benchmark rate unchanged suggests that the Fed believes that higher borrowing rates have made progress in controlling inflation.

It said in a statement: “The Committee seeks to achieve a maximum employment and inflation rate at the rate of 2% in the long term.” In support of these objectives, the Committee decided to maintain the target range for the federal funds rate between 5 and 5.25%.

“Keeping the target range stable at this meeting allows the Committee to assess additional information and its implications for monetary policy.”

Stock and bond prices fell following the decision to leave interest rates unchanged, while further increases could come later this year.

The Dow Jones Industrial Average fell 299 points, or about 1%.

Fed Chairman Jerome Powell spoke at a press conference after the announcement, where he reiterated his goal of bringing inflation back to his target rate of 2%.

He said the interest rate hikes over the past 15 months have yet to fully work their way through the economy.

“We have raised our key interest rate by 5 percentage points and have continued to reduce our holdings of securities at a steady pace. We have come a long way and the full effects of our tightening have yet to be felt. “, did he declare.

“We have seen the effects of our policy and demand tightening in the most interest rate sensitive sectors of the economy, particularly housing and investment,” he added.

“It will take time, however, for the full effects of monetary restraint to be realized, particularly on inflation.”

He pointed out that officials were focused on the decision this month, rather than rate changes in July and later this year.

Powell told reporters: “We haven’t made a decision for July. Of course it came up from time to time in the meeting, but the focus was really on what to do today. I would say two things: first, no decision has been made, second, I expect this to be a live meeting.

Consumer prices rose 4% year on year, from 4.9% in April

One reason officials may be predicting further rate hikes is that they anticipate a slightly healthier economy and more persistent inflation that may require higher rates to cool.

Their updated forecast calls for economic growth of 1% for 2023, an upgrade from a meager forecast of 0.4% in March.

And they expect “core” inflation, which excludes volatility in food and energy prices, of 3.9% by the end of the year, which is higher than they had expected three months ago.

Powell clarified that the Fed views the still-robust labor market and accompanying wage growth as contributing to high inflation.

At the same time, he said he was optimistic that falling apartment rental costs, among other things, could help dampen inflation in the coming months.

He stressed that the Fed wanted to see a slowdown in inflation materialize before suspending further rate hikes.

“We want to see inflation come down decisively,” he said.

The latest statistics released by the US Department of Labor on Tuesday showed inflation rose just 0.1% between April and May – after rising 0.4% last month.

The 4% annual inflation rate is well below the 9.1% peak seen last June, and down from April’s 4.9% increase.

President Joe Biden hailed the inflation data as “good news for hard-working families” and said there was still work to be done to bring down the cost of living in the country, according to a statement released by the White House.

The increase in inflation in May was mainly due to rising house prices, as well as the rising cost of used vehicles and food, the Labor Department said.

Housing costs, which include rent, have remained stubbornly high, rising 8% over the past year.

This accounted for more than two-thirds of the total increase in items excluding food and energy.

Energy prices, on the other hand, fell 3.6% in May from April – and were down 11.7% year on year.