The United States Federal Reserve has chosen to keep its current key interest rate, which is at its highest level in 22 years, in an effort to tackle the recent surge in prices that had reached near-record levels. The rate target remains at 5.25%–5.5%.
The Federal Reserve has been gradually increasing borrowing costs in the hope of moderating economic growth and curbing inflation, which is the rate at which prices rise. This decision follows recent data indicating that the US economy has been expanding more rapidly than anticipated.
The idea behind raising interest rates is to combat inflation. By raising interest rates and making borrowing more expensive, it is expected that consumers will cut back on spending, leading to a slowdown in the rate of price increases.
The Federal Reserve has faced criticism, with some suggesting that keeping interest rates at elevated levels might expose the US economy to the risk of entering a recession. Nevertheless, the data revealed that the US economy grew by 4.9% from July to September, exceeding expectations. This growth was driven by a robust job market and increased consumer spending.
The Federal Reserve’s decision indicates that a reduction in interest rates may be postponed, given the current inflation rate of 3.7% in the US, which surpasses the Fed’s target of 2%.
Chairman Powell also pointed out that there were “significant issues” that the central bank needed to consider. Powell cited the heightened global geopolitical tensions, including the situation in Ukraine, and indicated that the Federal Reserve was carefully monitoring the “economic implications” of the Israel-Gaza situation.
Higher borrowing costs have led to more expensive loans for businesses, homes, and other goods and services in various economies, signalling the end of the era of low-cost borrowing. Similarly, households in the UK have experienced tightened budgets due to higher mortgage payments or borrowing costs.
The Bank of England is widely expected to maintain its current interest rate when it announces its next decision. In September, the rate was left unchanged, ending a streak of 14 consecutive increases.