The Fed’s decision to pause is not unexpected. The vast majority of economists already expected the Fed to leave interest rates unchanged. With the previous interest rate decision in May, the interest rate in the United States increased by a quarter of a percentage point in the range of 5.00 to 5.25%. This is the highest level in sixteen years.
By making loans more expensive, the Fed is curbing demand in the economy and this should keep prices from rising so fast. The danger is that the economy could end up in a recession due to falling demand. The Fed started raising interest rates in March of last year.
Strong intervention less necessary
Powell stressed in a speech in May that strong central bank intervention is less necessary. This is because the US financial sector is already experiencing so-called monetary tightening following the recent turmoil in the banking sector. As a result, banks have already become more cautious about making new loans, so that borrowing costs need not have increased so much that they curb demand.
However, all attention is on what Powell will say about future interest rate policy. It was announced on Tuesday that inflation in the world’s largest economy had cooled to 4% in May. However, core inflation, which does not take into account volatility in energy and food prices, remains stubbornly high at 5.3%.