After 25 months and 17 straight meetings with a quarter-percentage point rate hike, the Federal Open Market Committee (FOMC) decided to hold rates steady at its meeting Tuesday (Aug. 8).
CBS MarketWatch reported that the move was seen as giving policy makers time to see whether the dust settles on the economic outlook and the central question of whether they have raised interest rates enough to cool inflationary pressures or overshot by hiking too many times putting growth at risk.
The decision keeps the Fed’s key fed funds interest rate at 5.25%. The FOMC had moved that rate up slowly but steadily from a 46-year low of 1% beginning in June 2004.
The vote of the ten-member committee was not unanimous. Richmond Fed president Jeffrey Lacker wanted the central bank to hike rates again.
Fed officials have their fingers crossed that the picture clears a bit by the time of their next meeting on Sept. 20.
In its statement, as expected, the FOMC kept all its options on the table. It repeated that any further tightening would depend on the economic data.
The Fed said that inflation risks remain. This is a signal that the Fed is leaning to hike rates again.
But at the same time, the Fed said that price pressures are likely to moderate over time “reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.”
The Fed said that economic growth “has moderated,” from high- energy costs and the gradual cooling of the housing markets.
Some economists believe the economy will slow sharply, making any more rate hikes unnecessary, and leading the central bank to consider cutting rates by the end of the year.
But others predict more rate hikes will be needed to cool overheating inflationary pressures.
Ethan Harris, chief economist at Lehman Bros, said the Fed had been seeking the market’s permission to pause.
Fed chief Ben Bernanke first raised the possibility of a pause in April. At the time, he emphasized in his April testimony that a pause would not necessarily mean the end to rate hikes. If inflation continues to accelerate beyond expectations, or growth reignites, the Fed could be raising rates again soon.
The permission came over the past six weeks as economic data showed the U.S. economy is slowing in a manner that the Fed has been looking for ever since it began raising interest rates two years ago.
Job growth has averaged 112,000 in the past four months. Job growth weaker than expected in July
And growth as measured by the gross domestic product, slowed to a 2.5% rate in the second quarter from a 5.6% rate in the first three months of the year.
Fed officials have said that slower growth over time will reduce inflation pressures and bring core inflation – now running at an 11-year high of 2.4% – back under the Fed’s 2% ceiling.
There is some concern that the economy may be slowing too fast, particularly since the lagged impact of the Fed’s past 17 rate hikes has not been felt. Economists estimate that these lags can last up to18 months.
Ahead of the announcement, financial markets see about a 50/50 chance the fed funds rate will rise to 5.5% at either the September or October meetings.