Federal Reserve Puts an End to 10-Month Rate Rise

The US Federal Reserve has finally decided to end its long run of rate hikes. For some, the move is a sign that the central bank is getting a handle on the country’s inflation.

On Wednesday, the Federal Reserve decided against raising interest rates for another month. The pause is the first in over a year of consecutive rate increases. Since March 2022, when the interest rate was zero, the Fed has raised interest rates ten times in a row, matching a pace last witnessed in the 1980s. Wednesday’s decision leaves interest rates at 5% to 5.25%.

Is the Fed Getting a Handle on Inflation?

The Fed is the central banking institution of the United States, responsible for managing monetary policy to promote economic growth, price stability, and employment. It is a lender of last resort, and its decisions affect the interest rates on banking loans.

Rate rises by the Fed increase borrowing costs, often leading to reduced borrowing and investment activity. This can dampen consumer spending, business expansion, and overall economic growth. By the same token, lower rates stimulate borrowing and economic activity.

However, the Fed has been steadily increasing rates to put a halt to inflation. In June last year, inflation hit a 40-year high of 9.1% as food and energy costs soared. However, in May of this year, inflation dropped to 4%, the lowest rate since April 2021.

The Fed expanded on its Open Market Committee’s deliberations in a statement:

“Recent indicators suggest that economic activity has continued to expand at a modest pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.

The US banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5 to 5-1/4 percent.”

Today’s Rate Pause Was Widely Expected

Rate changes by the Fed also indirectly affect the crypto markets. When rates rise, investors may shift their funds from cryptocurrencies to more stable assets, causing short-term downward pressure. 

However, Fed watchers were widely expecting today’s pause, so there has been minimal reaction on the markets. Some have met the decision with considerable relief.

The Federal Reserve’s rate hikes can send tremors through the banking and financial sectors. In the view of some, the hikes led directly to the collapse of Silicon Valley Bank in March, the largest US bank failure since 2008. Bank managers’ heavy investment in long-term government bonds, which decline in value with rising rates, exacerbated the situation.

Besides its systemic importance in the general economy, Silicon Valley Bank was also one of the banks of choice for the crypto industry.