- The central bank interest rate remains in the range of 5.25%-5.50%.
- The Fed says the economy grew at a “strong” pace in the third quarter
- Traders are adding to bets that the Fed is done raising interest rates
WASHINGTON (Reuters) – The Federal Reserve kept interest rates unchanged on Wednesday but left the door open to another increase in borrowing costs in a policy statement that acknowledged the surprising strength of the U.S. economy but also pointed to the tougher financial conditions the U.S. economy faces. . Businesses and families.
“Economic activity expanded at a strong pace in the third quarter,” the US central bank said in a statement after a two-day meeting during which officials unanimously agreed to keep the benchmark overnight interest rate in the range of 5.25%-5.50%. It’s been since July.
The language represents an upgrade to the “strong pace” of activity the Fed saw as of its September meeting, and tracks recent data that showed U.S. gross domestic product grew at an annual rate of 4.9% in the third quarter.
US stocks traded higher after the policy statement was released while the US dollar (.DXY) trimmed gains against a basket of currencies. US Treasury yields fell. Short-term US interest rate traders have added to bets that the Federal Reserve is done raising interest rates and will start lowering rates by June next year.
“The statement leans to the cautious side,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “The fact that they left rates unchanged for the second time in a row suggests that the Fed may leave rates unchanged in December. If they do, it means the Fed is done.”
Although markets believe the Fed’s rate hike campaign may be over, with financial conditions tightening on their own through market-based interest rate hikes, data pointing to a stronger-than-expected economy and labor market kept the possibility of a hike in sight. Interest rates again. table.
The Fed’s latest statement noted that with job gains remaining “strong” and inflation remaining “high,” the central bank continues to consider “how much additional policy tightening may be appropriate to return inflation to 2% over time.”
Focus on Powell
Asked about the degree to which higher bond yields replace the need for additional interest rate increases, Fed Chairman Jerome Powell said open market borrowing costs would need to be sustainably higher in order to influence the central bank’s future monetary policy decisions.
Tighter financial conditions could impact the Fed’s actions if they persist and “it remains to be seen” whether that is the case, Powell said in a news conference following the release of the policy statement.
But he added that rising Treasury yields “show up through” real-world borrowing costs.
Yields on longer-term Treasuries have risen by about 1 percentage point since the Fed’s last rate hike in July, even as the central bank’s interest rate has remained unchanged since then.
The policy statement itself has become increasingly terse, as officials become less certain about their next move, balancing the slow but steady decline in inflation with a sense that the economy is likely to slow in the coming months, and fears of pushing harder for higher interest rates. It can lead to too much slowdown.
The Fed continues to monitor the evolving impact of past interest rate hikes, as it considers further action, mindful of “the delay with which monetary policy impacts economic activity, inflation, and economic and financial developments,” the statement issued Wednesday said.
The phrase was used to indicate a degree of patience in deciding on further interest rate increases, acknowledging that the full impact of the 5.25 percentage points in interest rate hikes since March 2022 has not yet been felt.
Adding to the potential pressures are rising market-based interest rates, which could further weaken economic growth.
The statement noted this potential impact, adding a reference to tighter financial conditions as one of the factors “likely to impact economic activity,” with effects yet to be confirmed.
Howard Schneider reports. Edited by Paul Simao
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