Home Mutual Funds Fed Holds Interest Rate Steady To Fight Still-Too-High Inflation

Fed Holds Interest Rate Steady To Fight Still-Too-High Inflation

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  • The Federal Reserve is keeping its key interest rate at its highest since 2001 in an effort to push down inflation, in a widely anticipated move.
  • The central bank indicated its willingness to keep interest rates higher for longer until high inflation is vanquished.
  • Hopes the Fed would cut rates soon have dimmed as inflation has proven more stubborn than expected at the beginning of the year.
  • The Fed funds rate staying high influences interest rates on all kinds of loans, and keeps upward pressure on borrowing costs for mortgages and credit cards among other things.

The cost of living is still rising too fast for the Federal Reserve, and the Fed is keeping interest rates high to fight inflation.

Members of the central bank’s policy committee voted unanimously Wednesday to keep the crucial fed funds rate in its current range of 5.25% to 5.50%. Officials held the rate at its highest since 2001 to fight inflation that’s run too high for comfort in the first few months of 2024.

In an official statement, Fed officials acknowledged that progress against inflation has stalled, necessitating keeping interest rates high to discourage borrowing and spending and cool down the economy.

“In recent months, there has been a lack of further progress toward the Committee’s 2% inflation objective.” the Federal Open Market Committee said in a statement, adding language that was absent from the statement the group made when it previously met in March.

Data is Driving Fed to Hold Rates For Longer

Fed officials have said data have driven their interest rate decisions, and the data has pushed policymakers in a more pessimistic direction as they assess their efforts to quell high inflation that flared up as the economy reopened from the pandemic. 

The annual inflation rate, as measured by the Consumer Price Index, had fallen to the 3% range at the outset of the year, down from its recent peak at 9.1% in June 2022. But the Fed’s goal of a 2% annual rate got farther away, as it rose to 3.5% as of March, dampening hopes that the Fed would be able to cut interest rates this summer. 

Other reports have shown that almost any way you measure it, the economy is running hot despite interest rate hikes since March 2022 that were supposed to cool it down: wage increases are accelerating, home prices are hitting record highs, and jobs remain plentiful—meaning there is little pressure on the Fed to cut interest rates to stimulate the economy and prevent a recession.

A lower fed funds rates would reduce upward pressure on interest rates for mortgages, credit cards, business loans, and other types of credit that currently come with borrowing costs at or near their highest in decades.

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