The Federal Reserve held interest rates at their current 22-year high for a second consecutive meeting today.
The Federal Open Market Committee opted for another pause, keeping the federal funds rate at its current range of 5.25 and 5.5 per cent.
But continued labour market tightness, surprising consumer strength and solid economic growth mean the Fed is not ruling out further rate hikes, as the central bank continues its fight against inflation.
The Bank of England is also expected to opt for another pause at 5.25 per cent when its Monetary Policy Committee meets on Thursday.
Fed chair Jerome Powell has previously warned that signs of an overheating economy could mean interest rates may have to rise again
The leading US stock market indices, the S&P 500 and Dow Jones IA, climbed 1.05 per cent and 0.7 per cent today on the decision.
The Fed has opted for 11 rate increases since March 2022, helping bring the US inflation rate to 3.7 per cent in September, down from 3.67 per cent last month and 8.2 per cent last year.
But inflation remains above the Fed’s target of 2 per cent, driving concerns that the bank’s tightening cycle has not done enough to sufficiently supress demand.
The US economy remains strong, with annual GDP growth of 4.9 per cent for the third quarter, solid consumer spending and historically low unemployment – all drivers of inflation.
The war on the Middle East, related oil price growth and a sell-off in Treasuries complicate the matter further.
M&G’s ‘spooky’ charts: Inflation usually comes in waves
Franck Dixmier, global chief information officer for fixed income at Allianz Global Investors, predicted a hold, saying: ‘We believe that the Fed has completed its rate hike cycle.
‘Of course, we cannot rule out the possibility of a final hike at the end of the year, which the markets are anticipating with a low probability (30 per cent).
‘But we believe that this would have only a limited impact on the markets. Investors are looking further ahead, preparing for a long period of plateauing interest rates, with the first cut anticipated in mid-2024.’
M&G’s ‘spooky’ charts: ‘Real rates’ back in positive territory, making a recession more likely
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