Fed poised to hold rates steady despite economy's bullish tone

investing.com:

By Howard Schneider

WASHINGTON (Reuters) — Throughout its two-year battle with inflation, the Federal Reserve has tried to squeeze consumers hard enough through higher interest rates that they stop spending, bring demand in line with supply, and drive U.S. economic growth below its potential to ease price pressures.

It hasn't happened yet.

With financial markets expecting the U.S. central bank to keep interest rates on hold at the end of a two-day policy meeting on Wednesday, policymakers now have to judge whether the economy's stronger-than-anticipated performance is a last gasp of the consumer splurge that began during the COVID-19 pandemic, or evidence that monetary policy still isn't strict enough to fully return inflation to the Fed's 2% target.

Since the last policy meeting in September, when the central bank's policymakers also left rates unchanged, incoming data has shown stronger-than-expected job growth, stronger-than-anticipated economic growth, and only sluggish improvement in the pace of inflation that, at 3.4% in September based on the Fed's preferred gauge, remains well above the target.

There are reasons for the central bank to be, as policymakers have said, «careful» in approving any further rate increases. Most notable are market-based interest rates that have been driven higher by investors independent of any action by the Fed: Yields on long-term U.S. Treasury bonds have spiked since last summer and the average rate on a 30-year fixed-rate mortgage has climbed to close to 8%, a level not seen in nearly a quarter of a century. Ultimately, Fed officials feel these developments will slow business and household spending.

But recent weeks have provided little clarity on when that might happen, with