Fed's historic rate hikes put inflation under control

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Fed's historic rate hikes put inflation under control

The Federal Reserve's historic rate hikes over the past 18 months have put inflation under control, leaving the main U.S. interest rate unchanged.

The central bank kept its policy rate in the range of 5.25% to 5.50%, acknowledgering that inflation is still higher than its 2% target.

The Fed said that the economy is in a stable state, with job gains slowing and tighter credit conditions likely to slow economic activity and stem inflation.

The Fed had raised interest rates at a historically fast pace in the last 18 months, as it increased its main rate at 11 consecutive meetings from March last year to July's meeting.

It did that to try to control inflation as U.S. consumer prices began to rise in late 2021 and hit 40-year highs last summer.

In August, the Bureau of Labor Statistics said consumer prices rose 3.7% from the same period last year. The Fed's goal is to see the value of the stock rise to 2%, but it is a significant change from last year's peak of 9.1%.

The Fed yesterday announced that the situation had improved enough for it to take a wait-and-see approach, at least for another month.

After the Covid pandemic, the central bank had reduced interest rates to zero percent to 0.25%. For years after the global financial crisis of 2007-08, rates were at that rock-bottom level.

In more than 20 years, interest rates have surged from a historic low of almost zero to their highest level. To top it off, interest rates on credit cards and mortgages were up to long-term highs, while payments from Treasury bonds and interest rates on checking accounts were the strongest they've been in years.

The rate increases were intended to reduce inflation by slowing the economy, leading to the cost of borrowing for both businesses and individuals. There are signs that the rate hikes have had their intended effect, and some optimism could achieve its goal without tipping the economy into a recession.

The job market, for example, remains strong, with wages increasing and unemployment rates near historic lows.

A recession, by contrast, could result in a lower level of inflation, but with widespread job losses.

Investors had long feared this possibility, which meant that some of the Fed's more hawkish moves led to stock market sell-offs.

The Fed's next interest rate decision will be made on Nov. 1, with the Federal Open Market Committee scheduled to meet again on Oct. 31. This means that consumer price data for the month of September, which is expected to be released on Oct. 12th, is going to be more important in determining what the central bank does next.

In the months to come, interest rates are likely to increase. Inflation pressures are easing, widely speaking, but remain well above desirable levels with the risk of further increases in oil prices, so the Fed cannot yet declare victory, said Greg McBride, chief financial analyst for Bankrate.