US Fed Holds Interest Rate Steady for 2nd Time

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Facts

  • The US Federal Reserve announced Wednesday that it will not increase interest rates after concluding a two-day meeting that saw officials unanimously decide to leave the benchmark rate unchanged in the 5.25%-5.50% range, where it has stood since July.1
  • This marks the second consecutive time the rate has been held steady after a run of 11 rate hikes since March 2022 to counter runaway inflation, which has seen the benchmark rate reach a 22-year high.2
  • This comes as inflation — down from its peak of 9.1% in 2022 — remains above the target rate of 2%, sitting at over 3%. Fed Chair Jerome Powell said that it will observe how the economy responds to the previous rate hikes before deciding on another increase.3
  • Powell noted the US economy has remained resilient despite the Fed’s efforts to cool it with rate hikes. Nonfarm payrolls were above Wall Street expectations in September, growing by 336K, while third-quarter GDP grew at a 4.9% annualized rate — a performance Powell said could push the Fed to keep tightening its policy at December's meeting.4
  • The previous rate hikes have contributed to surging bond yields. As yields increase, bond prices decrease, meaning that investors are less likely to invest in Treasurys. This presents problems for the Treasury, which is auctioning off $776B of debt in the fourth quarter.4
  • The stock market rallied after the Fed’s decision, with the Dow Jones soaring 0.8%, while the S&P 500 gained 1.1% and the Nasdaq Composite rose 1.6%. Tech stocks led the way as semiconductor company AMD saw its share price up by 9.3% while Nvidia’s rose 3.5%.5

Sources: 1Reuters, 2CNN (a), 3Associated Press, 4CNBC and 5CNN (b).

Narratives

  • Establishment-critical narrative, as provided by Bloomberg. Powell and the Fed are playing with fire as the central bank pauses interest rate hikes yet again despite persistent inflation. While inflation isn’t at the record-high of 9% from last year, it's still far above the 2% target, and the Fed’s current rate isn’t moving the needle. While it might be painful for some, the US economy must cool down, and that still hasn’t happened yet.
  • Pro-establishment narrative, as provided by Fortune. The Fed is taking a prudent approach, pausing rate hikes after 11 consecutive increases to observe how the economy responds to the previous moves. While inflation isn’t quite where it needs to be, it has still cooled dramatically over the last year. There's no easy solution to balancing inflation and economic growth, and the Fed is right to keep its options open.

Predictions