Fed likely to pause again with rates at 22-year high

WASHINGTON

The Federal Reserve will likely announce it is holding interest rates at a 22-year high on Nov. 1, as it looks to tackle inflation without damaging the resilient U.S. economy.

Analysts and traders parsing recent Fed speeches overwhelmingly expect the U.S. central bank to hold rates steady for the second meeting in a row as it looks to return inflation to its long-term target of two percent.

"Fed commentary has all but confirmed that the Fed will stay on hold in November," Bank of America economists wrote in a recent note to clients.

Interest rate hikes slow down inflation by raising the cost of borrowing from the bank, which dampens economic activity and weakens the labor market.

Since peaking at more than seven percent in June last year, inflation as measured by the Fed's favored yardstick has fallen by more than half - though it remains stuck firmly above three percent.

Futures traders assign a probability of 99.9 percent that the Fed will vote to hold rates steady in November, according to CME Group data.

In a surprising development for many analysts, the Fed's aggressive interest rate policy has not pushed the world's largest economy into a recession, and it looks unlikely to do so in the coming months.

In fact, resilient consumer spending fueled higher-than-expected annualized growth of 4.9 percent in the third quarter, building on positive growth in the first half of the year.

At the same time, hiring has picked up and unemployment remains close to historic lows.

Another factor weighing on the Fed as it mulls whether to hold its key short-term lending rate steady has been the recent surge in yields on longer-term government bonds.

Whereas the Fed's key short-term rate mainly affects the borrowing rates offered by banks, Treasury yields determine "everything from mortgage rates to corporate and municipal bond yields," KPMG Chief Economist Diane Swonk wrote in a recent note to clients.

"It has already added an Arctic blast to the mortgage winter, which has frozen current owners in place and locked first-time buyers out of the housing market," she said.

"Many within the Fed believe that the rise in yields we have seen are equivalent to an additional rate hike," she added.

Since the Fed's last rate-setting meeting, when most policymakers indicated they expected at least one more increase this year, officials have moderated their tone about further hikes.

Earlier this month, Fed Chair Jerome Powell said the current policy stance is "restrictive," suggesting monetary policy was working to put "downward pressure on economic activity and inflation."

The economy "is handling much higher rates - at least for now - without difficulty," he continued.

Against this backdrop, many analysts have indicated they expect a "hawkish" pause - whereby the Fed holds rates steady while indicating it could still hike rates again this year if needed.