The Federal Reserve announced on Wednesday that it will be pausing its interest rate hikes for the second time since beginning its current hiking cycle last year. However, the Fed also projected that rates will remain higher over the next two years than previously expected, providing some unwelcome news for investors hoping for rates to come down sooner rather than later.
The Fed will hold rates steady at the 22-year high of 5.25% to 5.5%, as widely expected. But perhaps more crucially, the Fed's quarterly economic forecast revealed policymakers expect interest rates to remain higher for longer.
Fed officials expect rates to sit at a median of 5.6% by year's end, the same as its projection of 5.6% in June's forecast, 5.1% by the end of 2024 versus 4.6% in June and 3.9% by the end of 2025 from 3.1% in June, maintaining its 2.5% long-term estimate.
The statement accompanying the release noted the Fed is “prepared to adjust the stance of monetary policy,” though the projections imply there will be one final 25 basis-point hike this year.
Fed staff increased their median projections for gross domestic product growth as well and decreased their outlook for the unemployment rate, indicating the central bank has higher confidence in the economy.
Stocks slipped following the Fed report, paring earlier gains and sending the S&P 500 to a modest decline for the day.
The Fed's decision to pause rate hikes is likely to have a positive impact on the global economy in the short term. It will give businesses and consumers more time to adjust to the higher interest rates that have already been implemented. This could help to boost economic growth and prevent a recession.
However, the Fed's projection of higher rates for longer could have a negative impact on the global economy in the medium to long term. Higher interest rates make it more expensive for businesses to borrow money and invest. This could lead to a slowdown in economic growth and higher unemployment.
The Fed's decision is also likely to have a significant impact on global currency markets. The US dollar is likely to strengthen against other currencies as investors seek out the safety of US assets. This could make it more difficult for exporters in other countries to compete and could lead to higher inflation in those countries.
Overall, the Fed's decision is likely to have a mixed impact on the global economy. It will provide some relief in the short term, but it could also lead to slower growth and higher inflation in the medium to long term.
Investors will be closely watching the Fed's next meeting in November for any signs that the central bank is planning to change its stance on monetary policy. If the Fed signals that it is willing to keep rates higher for longer than expected, this could lead to a further sell-off in stocks and other risk assets.
Investors should also be paying attention to the economic data in the coming months. If the data shows that the economy is slowing down or that inflation is rising, this could put pressure on the Fed to pause or even reverse its rate hikes.
Overall, the Fed's decision to pause rate hikes is a significant development that is likely to have a major impact on the global economy in the months and years to come.
