The Federal Reserve (FED) announced today, after its meeting with the Federal Open Market Committee (FOMC), that it will keep interest rates unchanged, keeping them in the range of 5.25% to 5.50% in January, due to the evolution which has shown inflation in the US.
As economic analysts had anticipated, the FED’s decision is aimed at controlling inflation to try to reach the goal of a 2% rate in the long term.
Jerome Powell’s announcement comes in the midst of inflation, which although it has begun to subside, has remained persistently high and at a level not seen in four decades, with the labor market strong and consumers spending with renewed confidence, in amid high housing prices, and with less fear that the country will fall into a brief, but ultimately economic recession.
The Committee decided to maintain the target range for the federal funds rate at 5.25 percent to 5.50 percent.
The FED’s previous increases were:
· 0.0%, December 13, 2023 at 5.25%
· 0.0%, November 1 at 5.25%
· 0.0%, September 20 at 5.25%
· 0.25%, July 27, at 5.25%
· 0.0%, June 14, at 5.00%
· 0.25%, May 3, 2023, at 5.00%
· 0.25%, March 22, at 4.75%
· 0.25%, February 1, to 4.5%
· 0.5%, December 14, 2022, at 4.25%
The US Bureau of Labor Statistics has reported that year-on-year inflation has had significant increases throughout the year:
. December 2023, 3.4%
. November, 3.1%
. October, 3.2%
. September 2023, 3.7%
· August, 3.7%
· July, 3.2%
· June, 3.0%
· May, 4.0%
· April, 4.9%
· March, 5%
· February, 6%
· January, 6.4%
· December 2022, 6.5%
The monetary policy announcement is one of several that have been recorded throughout 2022 and 2023, as part of the “normalization” process of the US economy, which seeks to address the strong inflation that in its latest report registered 3.4% year-on-year, which although it has been decreasing in the last twelve months, is still high.
The head of monetary policy in the US, Jerome Powel, has acknowledged that lowering inflation will not be easy, but he assured that it will continue to be a priority to address because it affects the American economy.
According to the central bank, in 2024 there could be further increases in interest rates, to rely on higher borrowing costs with the intention of curbing demand and achieving a faster-than-expected slowdown in inflation.
The series of rate increases would increase borrowing costs for consumers and businesses, increasing the chances of sending the economy into an economic slowdown and subsequently a recession.
Why are interest rates increasing?
An increase in rates decreases the availability of credit and increases its cost, thereby decreasing demand. The higher interest charges have a direct impact on people’s pockets, since the consumption of goods, car loans and mortgages tend to increase.
Low interest rates help the growth of the economy, since they encourage consumption and therefore there is more demand for products. The more products consumed, the more economic growth, but the negative side of keeping rates low is that consumption causes inflationary trends, as has been happening in recent months.
With the rise in rates, the supply of credit can be reduced since a higher interest rate implies a greater risk for the economic recovery of the portfolio and, in response, financial intermediaries react by limiting credit.
This translates into a decrease in demand, since there is a drop in consumption and investment, which results in lower inflation, which is what the FED seeks.
To the extent that inflation is outside the target range, the FED is expected to continue raising the interest rate, in such a way that it has an impact on consumption and therefore on prices.
Keep reading:
· US GDP increased 3.3% in the fourth quarter and 2.5% in all of 2023
· The FED decides to keep interest rates unchanged in December
· How likely is it that the FED will raise rates at its next meeting and how much will it cost us if it does?