Fed Hits Pause Button Again, Interest Rates Held At 5.25%-5.50%

The Federal Reserve rate maintained a status quo on interest rates at 5.25 per cent-5.50 per cent, after a 2-day FOMC meeting. For developing nations and emerging markets, the longer-than-expected higher interest rates can cause challenges as the dollar continues to get stronger as compared to other currencies.

This marks the sixth time the Fed has kept its benchmark interest rates unchanged, largely owing to the disappointing inflation numbers. 

While the policy statement did mention that "inflation has eased," the figures still remain elevated. "The (Federal Open Market Committee) does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2 per cent,"

This has also indicated that rate cuts might not be as close as the analysts were expecting them to be, creating broader pressure on the local currencies. 

The interest rates are currently at their highest level since 2007. The inflation figures have remained well above 3 per cent, as compared to its target rate of 2 per cent.

The Federal Reserve also said that it will slow down its balance sheet reduction from June 1, reducing the monthly runoff of Treasury bonds to $25 billion from the current $60 billion. Mortgage-backed securities will also continue to run off by up to $35 billion monthly.

As per a report by Reuters, this move is aimed at preventing a shortage of reserves in the financial system, similar to what had occurred in 2019 during the Fed's previous round of "quantitative tightening."