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Federal Reserve Decision to Hold Rates Creating Uncertainty

uncertainty over Federal Reserve rate cuts
© Markus Winkler

In a move that sent ripples through the financial markets, the Federal Reserve announced on Wednesday its decision to maintain interest rates at their current levels, and indicated it would not raise interest rates further. While the decision may have temporarily relieved some investors, it also stirred up a storm of uncertainty, with many questioning the potential ramifications of prolonged higher for longer interest rates.

The Federal Reserve’s choice to leave rates untouched comes amid mounting concerns over inflationary pressures that are coming back and an economy that has shown to be resilient. With the labor market still tight, many had anticipated the Fed might even have to raise interest rates further to cool the economy. However, the renewed cautious approach, and citing the need for further observation of economic data, puts a question mark on when we could see the first rate cut.

While the decision to keep rates unchanged may provide short-term stability, there are growing concerns about the long-term consequences of persistently high interest rates with 10-Year Treasury Yields still hovering above 4.5%.

One of the primary concerns is that the economy, may have to endure higher borrowing costs for much longer, pushing up the national debt and repayments to unsustainable levels. Such conditions could also exacerbate inflationary pressures if the Fed were to suddenly cut rates and start any kind of quantitive easing, leading to a potentially vicious cycle of rising prices and eroding purchasing power for consumers.

With the election approaching, the Biden administration is keen to get inflation down to an acceptable level, however with uncertainty over the direction of interest rate cuts, if any, and a resilient economy, there could be more inflation rather than less before we see a first rate cut, a difficult balancing act that will play out in the coming months ahead.