The Federal Reserve recently decided to pause its rate hikes after a period of four consecutive hikes due to inflation slowing more than expected. The central bank decided to not raise the federal funds rate, which is the rate that banks charge each other for short-term loans, at their December meeting concluding that inflation—which had been rising for the past three quarters—had slowed more than expected, and that raising rates further threatened to stunt economic growth.
This marks the first time in over a year that the Federal Reserve held back on raising interest rates. The decision was mainly due to slower-than-expected inflation, which had been increasing steadily since April. Core inflation, a measure of inflation that excludes volatile categories like food and energy, rose just 1.6 percent in October—below the Fed’s 2 percent target. The Fed announced that economic indicators such as job growth and consumer spending had “moderated” since their last meeting in October, and that these factors should be “closely monitored” in the coming months to make sure the economy remains strong.
The Federal Reserve’s decision to not raise rates has been welcomed by the markets, with the U.S. stock market and bond yields experiencing a bump. Some financial analysts are predicting that the Fed may not raise rates until the end of 2019, or even until 2020. While higher interest rates typically lead to greater investment returns, too much inflation can harm overall economic growth.
Given that inflation can erode away the value of a consumer’s buying power, it’s important to monitor inflation closely and for the Federal Reserve to respond accordingly to ensure healthy economic growth. It appears that the Federal Reserve has done just that by pausing rate hikes as inflation is on the decline.