Federal Reserve Chairman Jerome Powell and his colleagues voted on Wednesday to hold interest rates steady at a 23-year high. The central bank is trying to curb stubborn inflation.
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Federal Reserve Chairman Jerome Powell and his colleagues voted on Wednesday to hold interest rates steady at a 23-year high. The central bank is trying to curb stubborn inflation.
Justin Sullivan/Getty Images
The Federal Reserve voted on Wednesday to keep interest rates at a 23-year high in an attempt to curb stubborn inflation. Investors now believe borrowing costs may not start falling until September at the earliest.
“Inflation has slowed over the past year but remains elevated,” the Fed’s rate-setting committee said in a statement. “In recent months, there has been a lack of further progress toward the committee’s 2 percent inflation goal.”
According to the Commerce Department’s inflation gauge, which the Federal Reserve closely monitors, consumer prices rose 2.7% in March compared with the same period last year.
The central bank has kept its benchmark interest rate between 5.25% and 5.5% since July last year. As recently as March, Fed policymakers believed they could lower interest rates by an average of 0.75 percentage points this year. However, with inflation progress appearing to have stalled, hopes of lowering interest rates have faded.
While prices for many goods, such as cars and furniture, have fallen, prices for services such as restaurant meals and car repairs have continued to climb. Higher interest rates may have less of an impact on demand for services, making it harder for the Fed to control prices.
“When you buy a commodity, you typically take out a loan, like a car and certainly a house,” said Ernie Tedeschi, director of economics at the Yale Budget Lab. “Service spending is generally less sensitive to interest rates. ”
A U.S. Commerce Department report last week showed that consumer spending is increasingly leaning toward services.
What’s more, tens of millions of Americans are largely insulated from the Fed’s rate hikes because they’re locked into low-rate fixed-rate mortgages and don’t carry large amounts of credit card debt.
“That’s one of the reasons why consumers are still quite willing to go to restaurants and shopping malls,” said Oren Klachkin, financial markets economist at Nationwide. “They’re not feeling the pain of a high interest rate environment. Of course, that means inflation won’t be as high. Fast down. But that’s the trade-off we’re at now.”
