US Central Bank Holds Key Interest Rate Steady Amid Slowing Inflation

The US central bank has decided to keep its key interest rate unchanged, with a range of 5.25–5.50 percent, owing to a significant slowdown in inflation. This is the most stringent monetary policy since 2001.

The Open Market Committee, responsible for monetary policy, unanimously made this decision, emphasizing their intent to closely monitor future inflation trends. Committee members anticipate a potential 0.25 percentage point increase in the key interest rate later this year, signaling a prolonged period of higher interest rates.

Jerome Powell, the Director General, clarified that this decision doesn’t necessarily imply that monetary policy has sufficiently curbed inflation. Instead, it reflects a strategy to assess the impact of previous interest rate hikes on inflation.

According to Jan von Gerich, Chief Analyst at Nordea, the central bank’s projected interest rate path for the next year exceeds market expectations, indicating confidence in a strong economy and minimal employment weakening.

The decision had a minor impact on securities and currency markets.

The decision to maintain the interest rate is primarily driven by a significant slowdown in consumer price inflation. In August, consumer prices increased by 3.7 percent year-on-year and 0.6 percent month-on-month, a notable drop from the 9.1 percent inflation rate in June last year. The central bank aims for an average inflation rate of two percent over an extended period.

According to a recent economic forecast, the US economy is expected to grow by 2.1 percent this year, 1.5 percent next year, and 1.8 percent in 2025. Inflation is anticipated to slow down to 3.3 percent this year, 2.5 percent next year, and 2.2 percent in 2025. The unemployment rate is projected to rise to 3.8 percent this year and reach 4.1 percent in 2024-2025.

Jari Hännikäinen, a market economist at financial group OP, suggested that given the current outlook, the central bank is likely to maintain the key interest rate at its current level at least until spring.

Typically, the effects of monetary policy tightening on inflation become evident after about six months and reach their full impact in over a year. Over the past year and a half, the central bank has tightened monetary policy 11 times, including a substantial interest rate hike of 0.75 percentage points last year. In June, rate hikes were briefly paused but resumed in July with a 0.25 percentage point increase.

Inflation has surged over the past two years due to supply bottlenecks, substantial fiscal stimulus, and increased energy costs resulting from geopolitical events like Russia’s actions in Ukraine.

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