Fed Holds Rates Steady

Facts

• The US Federal Reserve maintained its key interest rate at 5.25-5.5% on Wednesday, hinting that long-run interest rates were higher than previously indicated.¹
• Shifting from its March stance, the Fed has indicated it expects to cut interest rates only once this year, holding on to the 23-year high borrowing costs.²
• While the May Consumer Price Index (CPI) released on Wednesday was better than expected, a lowering of rates will only follow a further slide in inflation, the Fed said.³
• Fed Chair Jerome Powell said inflation had come down without the economy suffering and that 'these dynamics can continue as long as they continue.'⁴
• Inflation has declined from its 9% level two years ago, but the CPI remains above the Fed's goal of 2%.⁵
• The Fed hiked its benchmark rates 11 times between March 2022 and July 2023 to tame a COVID-fueled inflation spike that reached a 40-year high of 9.1%.⁶

Sources: ¹CNBC, ²Ft, ³CNN, ⁴Reuters, ⁵Guardian and ⁶USA Today.

Narratives

• Establishment-critical narrative, as provided by Pgpf. By holding the rates high, the Fed risks increasing the government's debt costs significantly. This could crowd out important public investments in areas like infrastructure and education. If rates remain high for too long, the cost of borrowing will also remain high, creating severe long-term fiscal challenges. The Fed must reassess its policy.
• Pro-establishment narrative, as provided by CNBC. The Fed is keeping interest rates steady despite easing inflation because this is working as intended, and more progress is needed on the inflation front before initiating an interest rate-lowering trend. The Fed has warned that cutting rates too soon could undermine the efforts to control price rises and weaken the economy. Powell is right to stay the course.

Predictions