FINANCE
Federal Reserve maintains interest rates: How will this impact the US economy?
While progress has been made on inflation, the central bank says the indicators to lower rates have not yet been achieved.
In a closely watched decision, the Federal Reserve opted to maintain its current federal funds rate target range of 5.25% to 5.5% at its March 2024 meeting. This marks the sixth consecutive meeting where the Fed has held rates steady, following a series of mutliple hikes in 2022 aimed at curbing inflation.
The decision reflects a delicate balancing act for the central bank. While inflation has shown signs of cooling, dropping from a peak of 9.1% in June 2022 to 3.2% in February 2024, it remains stubbornly above the Fed’s target of 2%. Service sector inflation, encompassing rents, hotels, and healthcare, has proven particularly persistent, raising concerns that price pressures might not be fully under control.
What does the Federal Reserve’s decision mean?
The Fed’s future course of action will depend on incoming economic data. Persistently high unemployment or a significant decline in inflation could lead to rate cuts, neither of which have been seen with inflation as high as it is. In its reasoning, the Fed pointed to recent job market data showing signs of weakness, with high-profile companies announcing mass layoffs.
“We’ve seen some mixed economic data to start the year,” said Sam Millete, director of fixed income at Commonwealth Financial Network to CBS News.
The organisation’s chief, Jerome Powell, said in his January notes that a rate decrease for March was very unlikely, and the continued data trends have proved it.
The Fed’s decision has implications for borrowers and lenders across the economy. Consumers with variable-rate mortgages, auto loans, and credit cards can expect to see some stability in their interest rates for the time being. Businesses eyeing expansion are continuing to face headwinds due to the lack of a decrease in borrowing costs.
However, these borrowing rates are still much higher than they have been in the last 15 years. Rates around 0.25% were very normal in the period after the financial crash of 2008 right up until the fallout of the covid-19 pandemic. The damage from these relatively high mortgage rates evidenced by continued increases in mortgage defaults.