Fed leaves rates unchanged, admits US economy ‘strong’

WASHINGTON, Nov 1 (Reuters) – The Federal Reserve kept interest rates steady on Wednesday but opened the door to further increases in borrowing costs in a policy statement that acknowledged the surprising strength of the U.S. economy. businesses and households.

“Economic activity expanded at a strong pace in the third quarter,” the US Federal Reserve said in a statement after a two-day meeting in which officials unanimously agreed to leave the overnight interest rate in a range of 5.25% – 5.50%. Since July.

The language marked an upgrade to a “solid pace” of Fed activity during its September meeting, and US gross domestic product grew at a 4.9% annual rate in the third quarter, according to the latest data.

U.S. stocks traded higher after the policy report, while the U.S. dollar (.DXY) gained against a basket of currencies. US Treasury yields fell. Traders of short-term US interest rates added to the bet that the central bank raised its policy rate and will begin cutting rates by June next year.

“The report leans on the wrong side,” said Peter Cardillo, chief market economist at Spartan Capital Securities. If it does, it means the central bank is over.”

Although markets thought the central bank’s rate-hike campaign was coming to an end as financial conditions themselves tightened with higher market-based interest rates, data pointing to a stronger-than-expected economy and labor market held out the possibility of another hike. table.

The central bank’s latest report noted that with job gains still “strong” and inflation still “elevated,” the central bank continues to consider “the degree of additional policy stabilization appropriate to bring inflation back to 2% over time.”

Focus on Powell

Asked to what extent rising bond yields would change the need for additional rate hikes, Fed Chairman Jerome Powell said such open-market borrowing costs would need to remain high enough to withstand the Fed’s future monetary policy decisions.

Tighter financial conditions could weigh on Fed actions.

But, he added, higher Treasury market yields “reflect” real-world borrowing costs.

While the central bank’s policy rate has since been unchanged, yields on long-dated Treasuries have risen about 1 percent since the central bank’s last rate hike in July.

The policy statement itself has largely been left out as officials remain uncertain about their next move, which will balance subdued but persistent inflation against a sense that the economy may slow in the coming months and worries about pushing too hard with rate hikes. Can slow down more than necessary.

The report released on Wednesday said the central bank was still monitoring the evolving impact of its past rate hikes while taking further action, aware of “monetary policy’s impact on economic activity and inflation and economic and financial developments”.

The phrase was used to indicate a degree of patience in deciding on further rate hikes, and acknowledges that the full impact of the 5.25 percentage point rate hikes from March 2022 is yet to be felt.

Adding to the potential pressure is an increase in market-based interest rates, which could further dampen economic growth.

The report nodded to the potential impact, adding a reference to tighter financial conditions as one of the factors “that could weigh on economic activity” with the outcome still uncertain.

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