Fed’s Monetary Policy Shift May Halt Rate Hikes

The Federal Reserve, under the leadership of Chair Jerome Powell, is anticipated to maintain its key short-term interest rate during today’s policy meeting, marking the second consecutive session without a change. This decision may indicate the conclusion of a nearly two-year-long campaign of raising rates. The monetary policy adjustment is attributed to favorable economic indicators, including a reduction in inflation and robust metrics in hiring, consumer spending, and overall economic growth.

Despite the ongoing trend of slowing inflation and solid economic performance, Powell and other Fed officials, including Christopher Waller from the Fed’s governing board, have not dismissed the possibility of one final rate increase. Michael Arone from State Street Global Advisors emphasized the significance of the Fed’s strict approach to tackling inflation.

Since March 2022, the Fed has increased its key interest rate from near zero to around 5.4% in response to the highest inflation levels seen in four decades. These adjustments have had a notable impact on various financial products, leading the average 30-year fixed mortgage rate to rise to nearly 8%. Nevertheless, annual inflation has notably decreased from a peak of 9.1% to 3.7%.

U.S. economic growth saw an uptick during the July-September quarter, fueled by strong consumer spending and heightened hiring rates. However, fluctuations in financial markets have led to increased long-term rates on U.S. Treasuries, declining stock prices, and heightened corporate borrowing costs.

Economists on Wall Street indicate that these market dynamics could contribute to a slowdown in economic growth while alleviating inflation-related pressures without the need for further rate hikes. The yield on the 10-year Treasury note has climbed to 5%, a level not observed in 16 years, primarily due to rising Treasury yields. This increase is influenced by factors such as the government’s forthcoming plan to issue potentially trillions in bonds over the coming years to address substantial and ongoing budget deficits, all while the Fed reduces its bond holdings.

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