The Fed Decides To Keep The Interest Rate Unchanged

The Federal Reserve (FED) announced this Wednesday, after its meeting with the Federal Open Market Committee (FOMC), that will keep interest rates unchanged, keeping them in the range of 5.25% to 5.50% in Novemberdue to the evolution that inflation has shown in the US.

As economic analysts had anticipated, the FED’s decision is aimed at controlling inflation to try to reach the long-term 2% rate goal.

“Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Employment growth has moderated since the beginning of the year, but remains strong, and the unemployment rate has remained low. Inflation remains high“said the FOMC.

“The American banking system is strong and resilient. Tighter financial and credit conditions for households and businesses are likely to impact economic activity, hiring and inflation. The extent of these effects remains uncertain. “The Committee remains very attentive to inflation risks,” added the FOMC.

Jerome Powell’s announcement comes in the midst of inflation, which, although it has begun to subside, has remained persistently high and at a level not seen in four decades, with the labor market strong and consumers spending despite the fact that the confidence of American consumers is diminished, in addition to high housing prices, and with fear that the country will fall into an economic recession.

The Committee decided to maintain the target range for the federal funds rate at 5.25 percent to 5.50 percent.

The FED’s previous increases were:

· 0.0%, September 20, 2023 at 5.25%
· 0.25%, July 27, at 5.25%
· 0.0%, June 14, at 5.00%
· 0.25%, May 3, 2023, at 5.00%
· 0.25%, March 22, at 4.75%
· 0.25%, February 1, to 4.5%
· 0.5%, December 14, 2022, at 4.25%
· 0.75%, November 2, at 3.75%

The US Bureau of Labor Statistics has reported that year-on-year inflation has had significant increases throughout the year:

. September 2023, 3.7%
· August, 3.7%
· July, 3.2%
· June, 3.0%
· May, 4.0%
· April, 4.9%
· March, 5%
· February, 6%
· January, 6.4%
· December 2022, 6.5%
· November, 7.1%
· October: 7.7%

The monetary policy announcement is one of several that have been recorded throughout 2022 and 2023, as part of the “normalization” process of the US economywhich seeks to address the strong inflation that in its last report registered 3.7% year-on-year, which although it has been decreasing in the last twelve months, is still high.

The head of monetary policy in the US, Jerome Powel, has acknowledged that lowering inflation will not be easy, but he assured that it will continue to be a priority to address because affects the American economy.

According to the central bank, in 2023 there could be further increases in interest rates, to rely on higher borrowing costs with the intention of curbing demand and achieving a faster-than-expected slowdown in inflation.

The series of rate increases would increase borrowing costs for consumers and businesses, making it more likely to tip the economy into an economic slowdown and after a recession.

Why interest rates increase

A rise in rates decreases the availability of credit and increases its cost, so demand decreases. The higher interest charges have a direct impact on people’s pockets, since the consumption of goods, car loans and mortgages tend to increase.

Low interest rates help the growth of the economy, since they encourage consumption and therefore there is more demand for products. The more products consumed, the more economic growth, but the negative side of keeping rates low is that consumption causes inflationary tendenciesas has been happening in recent months.

With the rise in rates, the supply of credit may be reduced since a higher interest rate implies a greater risk for the economic recovery of the portfolio and, in response, financial intermediaries They react by limiting credit.

This translates into a decrease in demand, since there is a drop in consumption and investment, which results in lower inflation, which is what the FED seeks.

To the extent that inflation is outside the target range, The FED is expected to continue raising the interest ratein such a way that it has an impact on consumption and therefore on prices.

Keep reading:
· The Fed keeps interest rates unchanged
· The Fed decides to increase the interest rate by 0.25 basis points
· How likely is it that the FED will raise rates at its next meeting and how much will it cost us if it does?