The US Federal Reserve has vote to pause its aggressive campaign of interest rate hikes despite “elevated” inflation, while indicating that another sharp increase could be needed before year-end.
After 10 straight increases since March 2022, the Fed’s rate-setting committee voted to hold its benchmark lending rate between 5% and 5.25%, the central bank said in a statement.
Despite the Fed’s aggressive campaign of monetary tightening, annual inflation remains stubbornly above its long-term target of 2%, while unemployment is close to record lows.
Holding interest rates steady gives policymakers on the Federal Open Market Committee (FOMC) time “to assess additional information and its implications for monetary policy,” the Fed said.
However, FOMC members hinted that more monetary tightening lies ahead. They raised the median projection for the Fed’s benchmark lending rate at the end of this year by another half percentage-point.
The US economy has shown signs of slowing, with the Fed recently forecasting a mild recession to begin later this year.
But the central bank said this evening that recent indicators suggest “economic activity has continued to expand at a modest pace.”
The Fed also released an updated economic forecast, lifting its 2023 GDP growth projections to 1% from 0.4% in March.
The move was broadly in line with analysts’ expectations.
Speaking on RTÉ’s Morning Ireland this morning, Aidan Donnelly, Head of Equities with Davy, predicted a pause in hikes.
“But in the wording that comes from the Fed they’ll make it clear that this is a short term thing, and that a decision about further interest rate increases haven’t been put away”, he said.
“We have seen continued higher levels of inflation than the Fed would want to see, and we’ve also seen very strong labour markets, which makes it very difficult to see inflation coming down very quickly,” he said.
“Both of those things are probably in the back of the minds of members of the Fed. They won’t want to say that they are done at this stage. They’ll want to leave the door open to a potential increase in July if they think it’s necessary.”
The European Central Bank is set to announce further interest rate increases tomorrow.
A poll of economists by Reuters found a clear majority expect the ECB to hike its key interest rates by 25 basis points tomorrow and again in July.
Last week, economic data showed that Europe slipped into a technical recession. Mr Donnelly said the ECB “will be watching that very closely because they don’t want to see the economy driven into recession just to fight off inflation”.
Source : RTE
