Federal Reserve Holds Interest Rate At 22-Year High

The Marriner S. Eccles Federal Reserve building during a renovation in Washington, DC, US, on Tuesday, Oct. 24, 2023. The Federal Reserve chair last week suggested the US central bank is inclined to hold interest rates steady again at its next meeting while leaving open the possibility of a future hike if policymakers see further signs of resilient economic growth.

Valerie Plesch / Bloomberg via Getty Images

Key Takeaways

  • As widely expected, the Federal Reserve held its key interest rate flat Wednesday, maintaining the pressure on interest rates for mortgages and other loans, which are at their highest in decades.
  • The Fed's anti-inflation interest rate hikes haven't stopped consumers from spending, but have hurt the economy in other ways by driving up borrowing costs.
  • The real estate market has been especially hard hit by mortgage rates that have more than doubled in the last two years, making housing unaffordable for many.

The Federal Reserve kept steady pressure on inflation and the economy Wednesday, as officials wait to see what further effects high borrowing costs will have on the economy.

As widely expected, the Federal Open Market Committee (FOMC), the Fed’s policy-setting body, voted unanimously to hold the influential fed funds rate at a range of 5.25% to 5.50%. The rate has been in that range since July and is the highest since 2001. 

It was the second meeting in a row that officials were content to leave the Fed’s key interest rate unchanged, in the first two-meeting pause since March 2022 when the Fed began hiking rates from near zero in an effort to slow the economy.

A policy statement issued by the FOMC was little changed from the one it released at its last meeting in September. It emphasized the need to control inflation while acknowledging high interest rates could hurt the economy more the longer they stay in place, while leaving the door open for further increases if inflation doesn't continue its downward trajectory.

The Fed’s interest rate hikes have pushed up borrowing costs on all kinds of loans including mortgages, credit cards, car loans, and business loans. The goal is to discourage borrowing and spending and allow supply and demand to come back into balance. 

As the rate has ratcheted higher, consumer price increases have slowed to a rise of 3.7% over the 12 months ending in September, down from the peak annual increase of 9.1% as of June 2022 as measured by the Consumer Price Index. 

By some measures, the U.S. economy seems to have shrugged off high borrowing costs. Consumer spending has accelerated, and economic growth surged to its highest in years. But they’ve had far-reaching effects in some parts of the economy.

The housing market has slowed into a state of near gridlock as high mortgage rates have made buying a house unaffordable for most potential buyers—the average rate offered for a 30-year fixed mortgage closed in on 8% last week, more than double the record low of 2.65% in January 2021 according to Freddie Mac. Costlier car loans have pushed average car payments over $1,000 for a growing number of buyers.

High rates have caused banks to get more strict about who they lend to, and on what  terms. Loan officers are afraid the rate hikes will cause a recession, and loans won’t be paid back.

Companies have been put under pressure by the high rates. For example, this week, Danish wind power company Ørsted canceled a $5 billion development off the coast of New Jersey, saying high rates had weakened the business case for the clean energy project. 

There were 516 bankruptcies declared by public companies through the year as of September, up from 263 at the same point of the year in 2022, S&P Global Business Intelligence said, citing rising interest rates as a major factor.

Another reason the FOMC could afford to hold back from raising rates: bond traders are doing the Fed’s work for it by selling off 10-year treasury notes, driving up yields, which briefly topped 5% for the first time in 16 years last week. 

That’s added to the upward pressure on borrowing costs. The drag on economic growth caused by the market-driven rise in long-term interest rates is equal to three 25-basis point Fed rate hikes, economists at Deutsche Bank estimated in an analysis last week. 

"Perhaps the most important thing is that these higher treasury yields are showing through higher borrowing costs for households and businesses," Federal Reserve chair Jerome Powell said in a press conference. "Those higher costs are going to weigh on economic activity, to the extent this tightening persists."

However, Former New York Federal Reserve President William Dudley, speaking on Bloomberg TV, said the markets are clearly taking away the notion that Powell believes the Fed is done raising rates, while that may not be the case.

"One of the problems the chairman has at this point, by talking to the markets in a sort of supportive way: Stocks go up, bond yields fall—that's loosening financial conditions," Dudley said. "So that's removing some of the constraint that was creating some impetus for not tightening monetary policy further."

While high interest rates are intended to make spending money harder, they’ve made it easier to save. Banks tracked by Investopedia are now offering the highest rates on certificates of deposit and high yield savings accounts in years.

This story has been updated since publication to add comments by Federal Reserve chair Jerome Powell and Former New York Federal Reserve President William Dudley.

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