US Federal Reserve officials have announced a pause in interest-rate hikes, leaving rates at 5% to 5.25% after more than a year of consecutive rate increases.
The decision, made by the Fed’s Federal Open Market Committee (FOMC), marks a shift in how Fed officials view the state of inflation, which reached a 40-year high of 9.1% in June last year as food and energy costs soared. Inflation in May was down to 4%, the lowest since April 2021.
The FOMC said in a statement: “Holding the target range steady at this meeting allows the committee to assess additional information and its implications for monetary policy … In assessing the appropriate stance of monetary policy, the committee will continue to monitor the implications of incoming information for the economic outlook.”
Even with the pause, Fed officials suggest further increases may come depending on how close the economy gets to their target of 2% inflation. Interest rates make borrowing money, particularly for mortgages or other loans, like car payments and student loans, more expensive.
At a press conference on Wednesday following the Fed’s announcement, chair Jerome Powell said that further rate increases were likely.
“Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2% over time,” Powell said, before warning that inflation was still a problem in the US economy.
He added: “Inflation has moderated somewhat since the middle of last year, nonetheless, inflation pressures continue to run high and the process of getting inflation down to 2% has a long way to go.”
The Fed is closely watching core inflation, which measures the price increases of goods and services excluding the volatile food and energy sectors, which have remained relatively stable over the last few months, even as the overall inflation rate has fallen.
“We want to see it move down decisively,” Powell said. “It may make sense for rates to move higher, but at a more moderate pace.”
Powell noted that a pause “gives us more information to make decisions” and “allows the economy a little more time to adapt as we make our decisions going forward”.
“It’s just the idea that we’re trying to get this right,” he said.
The Fed has raised interest rates 10 consecutive times – a pace not seen since the 1980s – since March 2022, when the interest rate was zero. The increases varied from 0.75% in the summer and fall, when inflation was at its highest, to increases of 0.25% seen this spring. The current interest rate, 5% to 5.25%, is the highest since 2007, before the 2008 financial crisis.
As it has been trying to tame inflation through interest rates, the Fed has also been watching the labor market for signs of cooling in the economy. Employers added 517,000 jobs in January, far surpassing expectations for the month, leading Fed officials to say at the time that there was still room for interest-rate increases without adverse impacts to the jobs market.
The latest data from May shows that the jobs market remains strong, with 339,000 jobs added last month. But the unemployment rate has slowly ticked up slightly, rising from 3.4% in April to 3.7% in May.
Even with signals that the economy is withstanding the higher interest rates, there have been indicators of impact, and Fed officials say that the full effects of interest rates have yet to be felt.
Perhaps the clearest effect was the collapse of Silicon Valley Bank in March, the largest bank failure in the US since 2008, which led to a weeks-long banking crisis. Bank managers had put much of the bank’s investments into longterm government bonds, which go down in value when interest rates rise.
Even after the bank’s collapse, Fed officials increased interest rates 0.25% after an FOMC meeting that month, saying that inflation still needed to come down, and they anticipated the effects of the collapse would be quickly contained.
