In an attempt to counteract the recent spike in prices that had come dangerously close to all-time highs, the US central bank decided to keep its benchmark interest rate at a 22-year high.
The Federal Reserve maintains its rate target at 5.25%–5.5% with steadfastness.
Over time, the central bank has raised borrowing costs in an effort to control inflation. The main objective is to restrain the economy's irrational exuberance and slow the rate of price increases.
This choice was made in response to new data that revealed the US economy had grown faster than expected, pleasantly surprising observers.
One weapon that central banks have in their toolbox to combat inflationary pressures is an increase in interest rates. According to the basic idea, if interest rates are raised and borrowing becomes more costly, consumers will be less likely to spend, which will slow down the rate of price increases. Much criticism has been directed towards the central bank, with some arguing that keeping interest rates higher could put the US economy at risk of entering a recession.
Nevertheless, the economy showed a strong 4.9% growth rate from July to September, dispelling the doubters. This number is supported by higher consumer spending and a tight labor market, and it indicates a notable increase from the previous three months.
The Federal Reserve declared that there was unanimous agreement to maintain current interest rates in a statement that was made public on Wednesday. The Fed also underlined that it is prepared to modify its policies "as needed" in the event that new risks materialize. The statement emphasized that keeping the current rate in place would give the central bank the time it needs to thoroughly assess new economic data.
The Federal Reserve's chair, Jerome Powell, issued a warning not to place too much weight on a few months' worth of encouraging economic data, saying that these were only the first steps toward fostering confidence that inflation was moving in the right direction. Stressing that there was still a long way to go, he acknowledged the challenges brought on by high inflation, which reduced consumers' purchasing power.
Powell also acknowledged that the Fed's prior round of rate increases had an impact on local economies. In spite of this, the rate of price increases continues to be much higher than the Fed's target of 2%.
Based on these developments, it appears unlikely that the central bank will move forward with plans to lower interest rates, especially since US inflation is currently 3.7%, above the Fed's target rate.
In an interview with the BBC, American independent economic analyst Peter Jankovskis described the decision to keep interest rates at current levels as predictable and said it would not likely have an immediate effect on the stock market.
He noted that the Federal Reserve's decision was influenced in part by the continuation of high long-term bond yields. These long-term government bond yields are an important indicator of how confident investors are in the strength of the US economy.
