Fed Holds Interest Rate Steady as Policymakers Assess Economy

The Federal Reserve on Wednesday decided to hold its key interest rate at a 22-year high — where policymakers have let it stand since July.

As expected, the central bank's Federal Open Mark Committee also left open the possibility of an additional hike in the future if inflation doesn't abate, but Fed Chairman Jerome Powell was circumspect about when another hike could come.

"We will continue to make our decisions meeting by meeting, based on the totality of the incoming data," Powell said at a news conference.

Between now and the Fed's December meeting, policymakers will receive two reports on inflation and the labor market in a slew of other economic data that could weigh on its next decision.

"We didn’t talk about making a decision in December today," Powell said.

Markets reacted positively to the announcement with the Dow Jones Industrial Average rising 222 points, or about 0.67%, and the yield on the benchmark 10-year Treasury dropping below 4.8%. The S&P rose 1.05% and the Nasdaq Composite rose 1.64%

The Fed's interest rate hikes have taken a heavy toll on consumers, pushing credit card rates to record levels and mortgage rates to around 8%.

In a battle against inflation, the central bank's Federal Open Market Committee has raised rates 11 times since March 2022 to 5.25% to 5.5%. Since July, they have have been gathering economic data to access how their hikes are winding their way through the economy.

Inflation has come down considerably, but still remains well above the Fed's target rate of 2%. Core inflation — the Fed's preferred inflation gauge because it excludes noisy energy and food prices — came in at 3.7% in September.

For all the Fed's efforts to chill economic activity, the labor market has proven resilient with an unemployment rate of 3.8% in September, consumer spending has held strong, and the economy has defied predictions of a recession, delivering 4.9% growth in the third quarter.

"Reducing inflation is likely to require a period of below-potential growth and some softening of employment market conditions," Powell said.

Still, the Fed's moves on Wednesday were widely anticipated.

"The six-week period between the September and November Fed meetings did not provide any economic data that would prevent the Fed from maintaining its current position, particularly given the recent rise in longer-term interest rates," said Joe Gaffoglio, president of Mutual of America Capital Management in New York.

Indeed, the Fed is getting a tailwind from higher yields in the bond market.

The 10-Year Treasury, which serves as a baseline interest rate for U.S. financial markets and consumer loans, recently crossed the 5% mark, a 16-year high. The spike in yields pushed the Standard & Poor's 500 into correction territory, down about 10% last week from its July 31 closing high, though it has since staged a reversal and is now down about 8% from that time.

“Given the recent rise in yields, the Fed is less likely to raise rates in December," said  Damanick Dantes, portfolio strategist, Global Markets at  Global X, a New York based provider of exchange traded funds. "Tighter financial conditions since the September FOMC meeting have partially achieved the Fed's goals.” 

Several economists expect the economy to slow drastically in the last three months of the year, putting the brakes on inflation.

"The most significant risks in the coming months include the potential for another government shutdown in mid-November, escalation of wars in the Middle East and Ukraine, and the possibility of additional rate hikes, all of which would create additional headwinds for financial markets," Gaffoglio said.