Fed decides to stand pat on rates, as market does its work

Federal Reserve policymakers on Wednesday decided to “hold ‘em” and let the treasurer and bond markets take care of quashing inflation and heading off recession.

In what may mark the end of an era of rising interest rates, the Fed chose to keep rates in the 5.25 to 5.5 percent range since July, and up from near-zero in March of 2022. Fed Chairman Jerome Powell said the Fed board seems to think that borrowing costs are now high enough to press on economic growth and slow inflation.

“Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation,” the Fed said in its Wednesday statement.

The thinking is the stabilization of interest rates will spur companies to increase prices more slowly, even as growth has been uniquely strong. Inflation has eased to 3.4% as of September down from more than 7% at its highest peak. Meanwhile, the labor and wage numbers have steadily expanded.

Market has 'done the Fed's work for them'

“With treasury yields rising and mortgage rates at a 20+ year high, the Federal Reserve is like a blackjack player with two face cards – the only sensible play at this meeting was to hold pat,” said Marty Green, principal at mortgage law firm Polunsky Beitel Green. “Since the last meeting, the markets have basically done the Fed’s work for them, with the rise in rates for treasuries and mortgages equating to another interest rate increase.”

Chairman Powell seemed to indicate the Fed’s vaunted “soft landing” was within reach as may be its goal to reduce inflation to around 2%.

“The sharp rise in long-term bond yields has reduced the need for further rate hikes as tighter financial conditions can substitute for a higher terminal policy rate,” said Thomas Holzheu, Swiss Re’s chief economist. “We expect the central bank to remain attuned to inflation risks…and delay the start of the easing cycle further out into 2024.”

Indeed, Powell didn’t close the door on future rate hikes despite the overall positive progress, pointing to the lag in economic statistics following interest rate moves.

“The full effects of our tightening have yet to be felt,” he said at a news conference. “Everyone has been very gratified to see that we’ve been able to achieve pretty significant progress on inflation without seeing the kind of increase in unemployment.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].