Status quo again: What to make of the Fed decision
US Federal Reserve has decided to hold the federal funds rate steady at 5.25-5%. This is the second meeting in a row the Fed has maintained the status quo on the funds rate. Why did the Fed do this and what are the implications of this decision? Mint explains: The federal funds rate is the interest rate at which commercial banks in the US lend money held with the Federal Reserve system to each other on an overnight basis.
In order to bring high inflation under control, the Fed had been raising the funds rate from March last year up until July. The idea was that at higher interest rates people and companies will borrow and spend less. This would help bring down consumer demand and wage inflation, and that, in turn, will help control overall inflation.
Of course, this takes time to have an impact, which is why the US central bank has pressed the pause button. The Fed’s favoured measured of inflation is the core personal consumption expenditures index, which leaves out food and fuel items while calculating inflation. In September, the inflation as per this index stood at 3.7%.
It is down considerably from a high of 5.6% in February 2022. Also, it has fallen rapidly from April 2023, when it was at 4.8%. Nonetheless, it is still some distance away from the Fed’s favoured level of 2%.
As the Fed chairperson Jerome Powell put it: “The process of getting inflation sustainably down to two percent has a long way to go." So, the Fed isn’t totally done with raising rates yet. Chairperson Powell said: “Now, more than 18 months into this, I think that the risks are getting more balanced." The Fed started raising the rate in March last year after core inflation peaked at 5.6% in February. What Powell perhaps meant is that while the
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