U.S. Fed keeps interest rates unchanged at 22-year high

Federal Reserve Chair Jerome Powell [Photo by Washington D.C. Reuters / Yonhap]

The U.S. Federal Reserve announced on Wednesday (local time) that it will maintain its current interest rates, given the continued softening of inflation indicators and rising U.S. Treasury yields.

Focus is on whether there will be further interest rate hikes and when the timing of a rate cut might occur.

However, Federal Reserve Chair Jerome Powell stated that there are no immediate considerations for an interest rate cut. Despite this, the market has evaluated this rate freeze as less hawkish than expected.

The Federal Reserve, during the regular Federal Open Market Committee (FOMC) meeting on Wednesday, unanimously decided to maintain the benchmark interest rate in the range of 5.25 percent to 5.50 percent. This keeps rates at their highest level since 2001.

The Fed aggressively raised rates 10 times in a row from March to May last year with the goal of taming the worst inflation in 40 years. It then froze rates for the first time in 15 months in June.

It raised rates by 0.25 percentage points in July and has now decided to keep rates unchanged.

The decision to maintain rates is underpinned by the decline in the personal consumption expenditures (PCE) price index, a key inflation indicator monitored by the FRB, which recorded a 3.7 percent increase in September, indicating a continued decrease.

In addition, the core consumer price index (CPI) for September, compared to the same month last year, also continued to decline at 4.1 percent, reinforcing the backdrop for the rate freeze.

Market analysis suggests that the recent surge in U.S. Treasury yields has reduced the necessity for further rate hikes. This is because the financial tightening resulting from the rise in bond yields is seen as being similar in effect to the Fed’s interest rate increases.

Powell noted during a press conference that financial conditions have tightened significantly in recent months, driven by higher longer-term bond yields.

The market believes that the Fed is likely to freeze the rate at the final FOMC meeting of this year in December.

However, there are some forecasts suggesting that a further 0.25 percentage point hike may still be possible, given factors such as inflation exceeding the Fed’s target of 2 percent.

“Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated,” the Federal Reserve said.

In September, the Fed used the term “solid” to describe economic activity and employment conditions.

However, in its latest statement, the word “strong” was used to describe economic activity, and the employment-related phrase was changed from “slowed” to “moderated.”

This change in wording is seen as a suggestion that there may be a need for further interest rate increases, as indicated by economic indicators.

In its economic forecast released in September, the Fed projected an end-of-year rate of 5.6 percent. At the time, there were widespread expectations of a 0.25 percentage point interest rate hike by the end of the year.

Chairman Powell emphasized during the press conference that the Federal Reserve is focusing on whether it has achieved a sufficiently restrictive monetary policy to lower inflation to 2 percent. “We will make decisions at each meeting,” he said, clarifying that the Federal Reserve is not currently considering interest rate cuts.

As a result of this decision to maintain interest rates, the interest rate differential between the U.S. and South Korea remains at 2.0 percentage points.

On Oct. 19, the Bank of Korea decided to maintain its benchmark interest rate at 3.50 percent.