US Fed hits pause on rate hike but warns of another increase later this year

The US Federal Reserve has decided to hit pause on the interest rate hike, a decision taken after two days of deliberation at theFederal Open Market Committee (FOMC) meeting. Whileinterest rates remain at a 22-year high between5.25-5.5 per cent, the Fed forecasted anadditional rate hike before the end of the year to bring down inflation.

"The Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 per cent. The Committee will continue to assess additional information and its implications for monetary policy," read the statement by FOMC.

Since March last year, the Fed has been pursuing a super-aggressive strategy of rate hikes to thwart consumer and business demands in a battle against price pressures that have become the Achilles heel for the federal agency.

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Economists believe that keeping interest rates high makes it costlier for people to borrow money. With borrowing getting expensive, consumers are forced to spend less. When spending declines, there is a fall in demand. It is therefore postulated that weakening demand will eventually reduce the price of goods.

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Immediately after the widely expected announcement, oil prices fell about one per cent.The long-lasting effects of the pandemic and war in Ukraine such as the disruption in the global supply chains and commodities markets, leading to a slowdown in the global economy and massive inflation worldwide have caused the Fed to routinely hike the rates.

The impact of months of higher interest rates might be showing now as the cooling of the US labour market suggests. Fresh challenges have emerged in the meantime, including the resumption of student loan repayments by the Biden administration coupled with an ongoing autoworker strike and a looming government shutdown as the US debt reached a historic milestone by passing $33 trillion for the first time earlier this week.

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Lull before the storm?

However, Wednesday's halt could be the lull before the storm asFOMC members left the median projection for interest rates between 5.50 per cent and 5.75 per cent, keeping alive the possibility of another quarter percentage point hike before year-end.

"The Committee’s assessments will take into account a wide range of information, including readings on labour market conditions, inflation pressures and inflation expectations, and financial and international developments," the statement by FOMC added.

(With inputs from agencies)

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