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The U.S. Federal Reserve Board has refrained from further hiking its benchmark interest rate. However, it also indicated that it may resume raising rates at its next meeting and beyond. The Fed’s efforts to bring down inflation are halfway there, and the central bank is likely to face difficult policy decisions from now on.
The Fed decided to leave its interest rate unchanged at 5.00% to 5.25% per year. This is the first time for the central bank to pause its interest rate hikes since March last year, when it ended zero interest rates and began raising rates to keep inflation in check.
At a press conference, Fed Chair Jerome Powell explained that the central bank will hold off on raising interest rates for now to get a better sense of how the rate hikes so far have been affecting prices and the economy. The Fed also intends to closely examine the impact on the economy of the financial instability caused by the string of bank failures since March.
It is believed that it will take time for the cumulative impact of interest rate hikes to become apparent. If financial instability causes banks to tighten their lending stance, it will have the same monetary tightening effect as interest rate hikes.
It is understandable that the Fed aims to manage its policy carefully while keeping an eye on such a situation.
Meanwhile, the Fed also announced its forecast for the policy rate at the end of 2023, raising it to 5.6% from the 5.1% estimated in March. This indicates the possibility of hikes amounting to an additional 0.5% this year.
The year-on-year rate of increase in the U.S. consumer price index in May was 4.0%, down from 4.9% in April and the lowest in two years and two months, but still well above the Fed’s target of 2%.
Although there was a drop in gasoline prices, which are of great interest to the public in the United States, a car-based society, services prices reportedly continued to rise due to higher wages caused by labor shortages.
The employment situation in the United States continues to improve, with the U.S. employment statistics in May showing an increase of 339,000 jobs on nonfarm payrolls from the previous month, exceeding market expectations. The Fed likely believes that inflationary pressures from higher wages are still strong.
However, Powell has declined to clearly state whether the Fed would resume the rate hikes at its next meeting in July, only saying, “We’ll look at all the data and make a decision.”
Since this is a difficult time to make a decision, it is hoped that the Fed will make efforts to disseminate information carefully so as not to confuse the market.
In the United States, many believe that the economy will slow down in the second half of this year. Vacancy rates in office buildings are rising due to the spread of telecommuting and other factors, and concerns have emerged that bank loans for commercial real estate will become uncollectible.
The hope is that the Fed will strive to steer monetary policy appropriately, while keeping a close eye on the economy and price trends, as well as the financial system.
