Fed Keeps Interest Rates Unchanged, Backing Up Strong U.S. Economy

The Federal Reserve kept interest rates stable on Wednesday but left the door open for further increases in borrowing costs in a policy statement highlighting the surprising strength of the U.S. economy while also pointing to tighter financial conditions facing businesses and households.

– “Economic activity expanded at a strong pace in the third quarter,” the Fed said in a policy statement following a two-day meeting where officials unanimously agreed to keep the benchmark overnight interest rate in a range of 5.25 to 5.50 percent, unchanged since July, Reuters reported.

This is an upgrade from the ‘solid pace’ of activity the Fed observed since its September meeting, following recent data showing that U.S. gross domestic product (GDP) grew at an annual rate of 4.9 percent in the third quarter.

U.S. stocks rose following the release of the policy statement while the U.S. dollar trimmed gains against a basket of currencies. Yields on U.S. government bonds fell to their lowest levels.

– “The fact that they kept rates unchanged for the second consecutive time suggests that the Fed could keep rates unchanged in December. And if they do, it means the Fed is done,” said Peter Cardillo, chief market economist at Spartan Capital Securities.

While markets believe the Fed’s rate-hiking campaign may be over, with financial conditions tightening on their own through higher market interest rates, data indicating a stronger economy and labor market than expected have kept the prospects for another increase alive.

In the latest Fed statement, it was noted that with still ‘strong’ job growth and still ‘elevated’ inflation, the central bank continues to consider ‘the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time.’

All Eyes on Powell

Fed Chair Jerome Powell will soon hold a press conference to elaborate on the statement and economic outlooks that have so far defied expectations of an imminent slowdown. His words could be particularly important for investors trying to gauge whether the Fed still plans to raise rates again, as most of its officials indicated in the September round of economic projections.

The policy statement itself has become increasingly cautious as officials have grown less certain about their next move, balancing between a slow but steady decline in inflation and a sense that the economy is likely to slow in the coming months, along with concerns that pushing too hard with rate increases could cause a slowdown more than necessary.

The statement noted that the Fed is still monitoring the lagged effects of its past rate increases while considering further actions, aware of ‘the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.’