Fed Keeps Rates Steady Amid Ongoing Cautious Policy Approach

By Yasin Ebrahim

The Federal Reserve maintained its interest rates on Wednesday, adhering to a cautious monetary policy stance, though it did not entirely rule out the possibility of future rate hikes.

The Federal Open Market Committee (FOMC) decided to keep the rates in a range of 5.25% to 5.5%.

Fed pauses for the second consecutive month but leaves door open for future hikes

This marked the second consecutive meeting in which the committee opted to hold rates steady, fostering optimism that the Fed may not resume rate hikes soon. However, Fed Chairman Jerome Powell refrained from dismissing the potential for further increases.

"We’re not confident at this time that we’ve reached such a stance," Powell stated when asked whether current financial conditions are sufficiently restrictive.

Impact of higher Treasury yields on policy decisions

The Fed’s decision to maintain its rates coincided with a surge in Treasury yields, which have reached multi-year highs and tightened financial conditions. Several Fed members, including Powell, indicated that these higher yields could play a role in curbing elevated inflation.

"These higher Treasury yields are translating into higher borrowing costs for households and businesses," he noted. "Those increased costs will likely weigh on economic activity," he added.

During his press conference, Powell explained that the influence of financial tightening—prompted by rising long-term Treasury yields—on future rate decisions would depend on two factors.

"First, the tighter conditions need to be persistent, which still remains to be seen," he mentioned. "Second, the rise in long-term rates cannot merely reflect anticipated policy changes from us."

Some analysts have argued that the recent spike in long-term Treasury yields is equivalent to approximately four 25-basis-point rate hikes, but Powell said it is "too early" to draw such conclusions.

Fed acknowledges increase in economic activity

Despite this, the uptick in economic activity poses a concern for the Fed as it could further fuel inflation, complicating efforts to reduce inflation toward the 2% target.

"Recent indicators suggest that economic activity expanded at a strong pace in the third quarter," the Fed highlighted in a statement.

Data released last week showed the U.S. economy grew by 4.9% in Q3, marking the fastest growth in nearly two years, supported by a robust labor market that has bolstered consumer spending.