The US Federal Reserve decided to maintain interest rates at a 23-year peak amidst persistent increases in the cost of living. Despite indications of inflation easing at a slower rate than desired in recent economic reports, the central bank chose to keep the benchmark lending rate steady at 5.25-5.50%.
Fed Chair Jerome Powell emphasised that inflation levels remained “still too high” and hinted that rate adjustments were not imminent until there was a more robust assurance of price growth trending towards the 2% target.
“The economy has made considerable progress toward our dual mandate objectives. Inflation has eased substantially over the past year while the labor market has remained strong and that’s very good news,” Powell said in a press conference after the end of the Federal Open Market Committee’s two-day policy meeting. “But inflation is still too high, further progress in bringing it down is not assured, and the path forward is uncertain.”
Though the Fed’s preferred inflation measure has decreased from its peak of 7.1% in 2022, it still stands notably above the 2% threshold at 2.7%. Powell, however, downplayed the likelihood of a rate hike at its next policy meeting in June.
Following the announcement, US stocks initially surged, with the S&P 500 rising by as much as 1.2% in the afternoon, only to end the day mostly lower as investors processed the decision. The FTSE 100 in London mirrored this trend, closing down by 0.3%.
“With the Federal Reserve’s unsurprising decision to keep its key rate unchanged in the range of 5.25%-5.5%, hovering at the highest level in more than two decades, Jerome Powell hinted at a higher-for-longer stance, noting a “lack of further progress” toward lowering inflation,” noted Marc Pussard, Head of Risk at APM Capital. “He further said that ‘restrictive monetary policy needs more time to do its job’. This causes some confusion for analysts who, on the one hand, see a falling GDP as motivation for rate cuts. In contrast, a strong labour market could well keep inflationary pressures high and even the possibility of another rate hike.
“Powell’s press conference caused equity markets to jump higher only to reverse their direction and finish largely unchanged,” he added. “The correction from March’s all-time highs in the S&P seems to reflect this lack of certainty, with equities poised to struggle to find a lack of direction in the short term. The US dollar seemed less disoriented by the news and sold off against the major currencies and gold, a theme that may well continue given inflation is yet to be vanquished.”
UAE Central Bank maintains interest rate steady
Shortly after the Fed’s announcement, the Central Bank of the UAE (CBUAE) said it has decided to maintain the Base Rate applicable to the Overnight Deposit Facility (ODF) at 5.40%.
“The CBUAE has also decided to maintain the interest rate applicable to borrowing short-term liquidity from the CBUAE at 50 basis points above the Base Rate for all standing credit facilities,” it said in a statement.
“The Base Rate, which is anchored to the US Federal Reserve’s IORB, signals the general stance of monetary policy and provides an effective floor for overnight money market interest rates in the UAE.”
