Fed Holds Interest Rates Steady Amid Robust Economic Growth

The U.S. Federal Reserve has kept its policy interest rate range steady at 5.25%-5.50% for the second consecutive time during its November meeting. This decision, made in response to ongoing inflation concerns, comes despite strong economic growth and notable job gains in the third quarter of the year. The current benchmark rate is the highest it has been in 22 years, reflecting a series of rate increases initiated in March 2022 to tackle inflation.

Jerome Powell, the Fed Chair, emphasized the delayed impact of monetary tightening and avoided discussing potential future rate hikes. While inflation remains a concern, the U.S. economy has shown resilience with a reported 4.9% growth rate in real GDP for Q3, supported by rising consumer spending and robust employment and wage increases.

However, worries about a potential economic slowdown are emerging as long-term U.S. interest rates reached a 16-year high of 5% in October, accompanied by rising Treasury yields. There is also uncertainty regarding consumer spending as borrowers resume student loan repayments that were paused during the COVID-19 pandemic.

David Kohl, Chief Economist at Julius Baer, anticipates that the Fed will maintain its interest rates until the third quarter of 2024, attributing this expectation to strong economic performance and declining inflation rates. He pointed out that increased bond yields and weaker stock markets have tightened financial conditions, sparking discussions about whether the current monetary policy is sufficiently restrictive.

In light of the global economic situation, several other central banks have also retained their interest rates. For instance, the UAE’s base rate for overnight deposits remains at 5.4%, and Qatar has opted to keep its rates steady following the Fed’s lead. Additionally, the European Central Bank has maintained its policy rate for the first time since June of the previous year, while the Bank of Japan continues with its approach of monetary easing.

Despite these strategies, rising interest rates in Europe have led to economic contraction, as seen by a 0.4% decline in the eurozone’s real GDP. Nonetheless, Kohl believes that softening economic growth and lower inflation will persuade the Federal Open Market Committee that further policy tightening is not necessary.