The Federal Reserve in the United States held its policy steady on the latest Wednesday meeting, choosing not to change the target range for the federal funds rate. The rate remains in the 5.25% to 5.50% corridor as policy makers assess the evolving outlook. The decision keeps policy tight as markets look ahead to the next review on December 13, when the Fed will decide how and when to modulate the pace of monetary tightening to address persistent inflation without choking growth.

The policy framework, designed to curb inflation following the pandemic, has driven the policy rate up from near zero to the current elevated level in a relatively short period. In July, the rate reached its current position and has stayed there since, a path that typically would slow spending and spur job cuts. Yet the U.S. economy has shown resilience, with activity not signaling a meaningful slowdown.

Since June, inflation has clearly cooled, and the Fed’s preferred gauge indicated a drop to 3.4% in September, down from a peak around 7.1% last year. This decline often accompanies softer economic momentum; however, the most recent data show a paradox: while growth has moderated, it also picked up in the latest quarter. The economy expanded at an annual rate of 4.9% in the quarter, marking the strongest pace since 2021. Hiring remains robust, with unemployment near 3.8% and payrolls posting gains for the thirty-third consecutive month. (Attribution: Federal Reserve)

Key questions

The central question is how the Fed will respond to this mixed picture. There is renewed talk that policy makers could push for another rate increase, a topic raised at the September meeting when officials discussed the possibility of pausing moves or resuming hikes in early 2024. Whether rates rise or hold, sentiment among many analysts suggests a higher-for-longer stance might prevail, aiming to cool demand enough to bring inflation back toward the 2% target. The duration of that approach remains the central uncertainty. (Attribution: Federal Reserve)

Part of the hesitation hinges on the broader global context, including actions by the European Central Bank, which also paused rate hikes for the first time in 15 months six days earlier. Financial markets have reacted to the policy stance by adjusting expectations for long-term interest rates, with long-dated bonds trading at different levels and mortgage costs, auto loans, credit card payments, and business investments influenced as funding conditions tighten. While these moves have yet to produce a clear, sustained slowdown in activity, they are shaping the Fed’s room to maneuver and its likely path going forward. The conversation around policy is watched closely by investors and policymakers alike. (Attribution: Federal Reserve)

Jerome Powell, the Fed chair, highlighted these considerations in recent public remarks. His comments at a New York conference last month were anticipated to shed light on the committee’s thinking about the trajectory of policy. The upcoming press briefing is expected to offer further clarification on the path the Fed intends to follow, with market participants narrowing in on signals about rate movements and the balance of risks between inflation and growth. (Attribution: Federal Reserve)

Officials often emphasize that decisions depend on incoming data, particularly the evolution of inflation and the strength of the labor market. The policy stance will be guided by the aim to preserve price stability while sustaining healthy employment and avoiding a sharp cooling of the economy. Analysts and observers will be closely watching the Fed’s communications for hints about the duration of any higher-rate regime and what that implies for borrowing costs across households and businesses. (Attribution: Federal Reserve)