Fed keeps rates steady as cautious approach to policy continues

By Yasin Ebrahim

Investing.com -- The Federal Reserve kept rates steady on Wednesday as the central bank continued its cautious monetary policy approach on bets that higher for longer rates will continue to put the squeeze on inflation despite the threat of ongoing "strong" economic growth.

The Federal Open Market Committee, the FOMC, kept its benchmark rate in a range of 5.25% to 5.5%.

The Fed’s decision to hold rates steady comes in the wake of a surge in Treasury yields to multi-year highs that have tightened financial conditions, prompting several Fed members including Fed Chairman Powell to suggest that higher Treasury yields could help rein in inflation.

"Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening," Powell said in a speech on Oct. 19 at the Economic Club of New York. Luncheon.

Some have suggested that the recent surge in yields on long-term Treasuries are equivalent to about four 25 basis point hikes.

“While Fed officials have made this point cautiously, it looks straightforward through the lens of our financial conditions index framework, which says that the recent tightening is the equivalent of about four 25bp hikes,” Goldman Sachs said in a recent note.

Yet, the pick-up in economic activity remains a worry for the Fed as it threatens to boost inflation, muddying the Fed’s progress toward bringing down inflation toward the 2% target.

The U.S. economy accelerated to 4.9% in Q3, data last week showed, marking the biggest rise in growth in nearly two years, underpinned by a still-strong labor market that has supported consumer spending.

As the Fed’s decision to hold was largely priced in, Powell’s press conference at 14:30 PM ET (18:30 GMT) will likely dominate investor attention as many are eager for further clues on whether the central bank remains likely to lift rates at future meetings.

At the prior meeting in September, Fed members maintained their forecast for one more hike this year, while reducing the number of rate cuts to two next year from a prior forecast of four cuts previously.

“Powell is likely to reiterate that the Committee believes they can ‘proceed carefully’ on policy decisions, especially in the face of a ’significant’ tightening in financial conditions driven by the rise in longer-term rates,” Deutsche Bank said in a note.

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