The Federal Reserve will only increase interest rates by 50 basis points, as opposed to 75 basis points as in recent months.
Fed Softens Its Monetary Policy Approach
The Federal Reserve has recently announced a 50 basis point rise in interest rates.
The U.S. central bank informed the Federal Open Market Committee (FOMC) of its decision to increase the federal funds rate by a half percentage point, bringing it from 4.25% to 4.50%.
The decision to only hike rates by 50 bps instead of 75 bps, as was normal during the previous six months is remarkable since it might signify a softening in the Fed’s monetary policy.
However, Fed Chair Jerome Powell stated that he anticipated the continuing raised interest rates at a slower pace over a longer time, indicating that financial markets will likely endure more pain in the coming months.
Interest rates are one of the Fed’s weapons for combating inflation. The central bank makes borrowing more costly by rising rates, forcing investors to sell their riskier assets for a surging U.S. currency.
Criticized for not taking inflation fears seriously, the central bank acted aggressively throughout 2022, increasing interest rates by 25 basis points in March, 50 basis points in June, and 75 basis points in September.
However, the Fed’s renewed enthusiasm for addressing inflation has prompted a new concern: its aggressive monetary policy might force the U.S. and its allies into a recession. The United Nations recently issued a warning, suggesting that the global economy might suffer from the Fed’s imprudent gamble.
This has caused investors in traditional finance and cryptocurrencies to fear that the Federal Reserve may swiftly reverse course on its monetary policy and begin reducing interest rates again, a theory popularly referred to as the “Fed pivot.”
While the Fed’s recent decision might be a start in that direction, it doesn’t appear that the central bank will begin decreasing rates soon. Powell restated his pledge to reduce inflation to 2%, and although yesterday’s CPI report indicated a fall in the year-over-year inflation rate, it remained 5.1% above Powell’s stated objective.