indicatorThe Owl

A “hawkish” pause

The U.S. Federal Reserve held off on a rate hike at its September meeting

By Rob Roach, ATB Economics 21 September 2023 2 min read

Despite the uptick in headline inflation in the U.S. seen last week, the U.S. Federal Reserve announced yesterday that it is leaving the federal funds target range* at its 22-year high of 5.25%-5.5%.

Like the Bank of Canada, the Fed has indicated that its interest rate decisions will be “data dependent,” so it remains to be seen what it will decide when it meets again at the end of next month.

But with the inflation rate running at 3.7% in the U.S. and 4.0% in Canada in August, there is still a long way to go on in both countries before the 2% target is achieved.

In keeping with this, the new projections released by the Fed point to another potential rate increase before the end of the year and fewer rate reductions in 2024.

Cementing this view, Federal Reserve Chair Jerome Powell noted after the meeting that “a majority of participants believe that it is more likely than not that it will be appropriate for us to raise rates one more time in the two remaining meetings this year.”

U.S. monetary policy affects us up here in Canada in a variety of ways, but perhaps the main concern at the moment is how well the U.S. economy will perform under the weight of “higher for longer” interest rates with any erosion of growth south of the border acting as a drag on Canada’s economy.

So far, the U.S. economy has been remarkably resilient and the threat of a recession has receded. The jury is out on whether this trend will continue, but a “soft landing” seems more likely than it did at the start of the inflation fight.

The Fed’s policymakers have revised up their economic projection for the U.S. economy, pegging real GDP growth this year at 2.1% (compared to 1.0% in their June outlook) and 1.5% in 2024 (up from 1.1% in the June outlook).

*In the United States, the federal funds target range is set by the Federal Reserve’s Federal Open Market Committee and functions as the economy’s benchmark interest rate.

Answer to the previous trivia question: A Wayne Gretzkey rookie card that sold for US$3.75 million in 2021 holds the record for the most expensive hockey card.

Today’s trivia question: How many years of additional training after medical school are required to be a certified neurosurgeon in Canada?

Interest rates in the U.S. have been on the rise since March 2022

Interest rates in the U.S. have been on the rise since March 2022

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