US Federal Reserve Keeps Interest Rates Unchanged, But Signals For 1 More Rate Hike Before 2023-End

The US Federal Reserve decided to keep the key funds rate unchanged at a 22-year high of 5.25-5.5%, however, the central bank signalled for the possibility of an additional rate hike before the end of the current year. FOMC is strongly committed to returning inflation to its 2% objective.

In its FOMC statement, it said, "The Committee seeks to achieve maximum employment and inflation at the rate of 2 per cent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 per cent."

FOMC said that the recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. However, inflation remains elevated.

In the case of the US banking system, FOMC said it is "sound and resilient." Adding Fed said, "Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks."

Reacting to the Fed policy, Subho Moulik, Founder & CEO, Appreciate, a fintech platform for savings and investments, said, "As US headline inflation as well as most US inflation component measures decline, the Fed has decided to pause rate hikes for the moment. If the macroeconomic outloook continues to hold steady, rate cuts in 2024 (an US election year) could point to significant upside for US markets overall in the next 6-12 months barring any large downside surprises arising from Ukraine or China."

While maintaining the status quo, FOMC has indicated that the borrowing costs are likely to stay higher for a longer period and that it estimates an additional 25 basis points (bps) rate hike before the end of the year to tame inflation.

Going forward, FOMC will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

Further, FOMC said that the committee will continue reducing its holdings of Treasury securities agency debt and agency mortgage-backed securities, as described in its previously announced plans.

To assess the appropriate stance of monetary policy, the FOMC said, "The Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals."

A wider range of information, including readings on labour market conditions, inflation pressures and inflation expectations, and financial and international developments will be taken into account by the committee.