US Federal Reserve set to hold rates steady at 22-year high

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The US Federal Reserve is set to hold interest rates steady at a 22-year high but keep the possibility of additional monetary tightening on the table in case its fight against inflation stalls.

The meeting will be the second in a row at which the Federal Open Market Committee opts not to increase interest rates, as officials seek more clarity on whether they have restrained economic activity sufficiently to bring inflation under control. After 11 increases since March 2022, the federal funds rate currently stands between 5.25-5.5 per cent.

The decision, to be announced at 2pm Eastern Time, comes at a delicate moment for global financial markets and the US economy, as war in the Middle East, warnings of renewed oil price volatility and a recent bond market sell-off complicate the outlook.

Financial conditions, including companies’ costs of borrowing money, have notably tightened since the Fed’s most recent meeting in September, at which officials reiterated their stance that there would be little let-up in elevated interest rates in coming years.

Long-dated Treasury yields have reached multi-decade highs, a surge that analysts as well as Fed officials view as aiding the central bank in its efforts to damp demand, which has been far more resilient than expected. Traders in fed funds futures markets broadly believe the central bank is done raising rates and will go on an extended hold until around the middle of next year.

The foremost question now is whether more restraint via higher borrowing costs is needed, especially given evidence that the world’s largest economy remains strong as consumers continue to spend and unemployment remains historically low. Some economists worry that this strength could arrest the moderation in inflation under way, meaning a bumpier path back to the Fed’s longstanding 2 per cent target.

Broad inflation indices, including the consumer price index, have fallen well below last year’s annual peak, but officials remain sensitive to the fact that certain price pressures have proven far more difficult to root out and in some corners of the economy are starting to resurface. Data released on Tuesday also showed that the pace of wage growth remains elevated.

There are also concerns about the impact from the escalating war in the Middle East. Global oil prices also remain historically high, despite a sell-off in recent days. The World Bank this week warned that a prolonged conflict could push crude prices beyond $150 a barrel. Food prices are also susceptible to destabilising increases, the multilateral lender said.

Amid that “range of uncertainties”, Jay Powell, the Fed chair, on Wednesday is expected to keep the door ajar to additional tightening, despite acknowledging recently that the task of balancing the risk of doing too much in terms of policy tightening versus too little had become more challenging.

Fresh evidence that economic growth is not sufficiently moderating or that the disinflation process has stalled could warrant renewed action, Powell and other officials have said.