In a highly-anticipated move, the Federal Reserve is likely to maintain its key interest rate steady in its meeting today, marking only the second time in eighteen months the central bank has refrained from hiking interest rates. This pause comes amidst a weakening economy, with sectors such as jobs and housing showing signs of strain. The previous spate of rate hikes had pushed the federal funds rate to a range of 5.25% to 5.5%, the highest level in 22 years, putting pressure on consumers and businesses trying to manage loans and credit card debt.

According to Michael Pearce, Lead U.S. economist for Oxford Economics, "We expect the Fed to leave rates unchanged at its September meeting.” Pearce’s prediction is based on renewed signs of weakness in rate-sensitive parts of the economy and cooling labor market conditions, which he believes should keep officials on the sidelines for the rest of the year. However, the Fed has left the door open for a potential hike before the year ends, adding a layer of uncertainty to the economic landscape.

Federal Reserve Anticipated to Hold Interest Rates Amid Weakening Economy

The Federal Reserve is predicted to maintain its key interest rate at the meeting scheduled for Wednesday, due to the continuing economic decline in various sectors such as jobs and housing. This would only be the second time in the past one and a half years that the central bank has refrained from hiking interest rates. The recent series of hikes had elevated the federal funds rate to a range of 5.25% and 5.5%, its highest level in over two decades. This has increased the burden on consumers and businesses in terms of loan affordability and credit card debt repayments.

The Decision

The decision regarding the interest rate will be announced by the Fed at 2:00 p.m. ET on Wednesday, September 20. Despite the weak economy, the Fed has left room for potentially one more hike before the year ends. "Renewed signs of weakness in rate-sensitive parts of the economy and cooling labor market conditions should keep officials on the sidelines over the rest of the year,’’ asserts Michael Pearce, Lead U.S. economist for Oxford Economics.

Role of Oil Prices

August’s higher inflation rate was majorly driven by the price of gas, which increased by 10.6% last month. However, they were 3.3% lower than the previous year and significantly below the $5 peak reached in 2022. Filling up your tank is unlikely to get cheaper in the near future due to an optimistic global economic forecast and OPEC’s ongoing reduction of oil production.

A Look at the Past

Since March 2022, the Fed has elevated its benchmark federal funds rate 11 times, leading to the current range of 5.25% to 5.5%. This includes a ten-meeting streak of rate hikes, the sharpest in four decades. After a pause in June, the hikes resumed in July with another quarter-point increase.

Impact on Mortgage Rates

Although the Fed doesn’t directly determine mortgage rates, its influence on the yield of the 10-year treasury bond, a guide for setting interest on an average 30-year loan, is contributing to higher mortgage rates. At the end of August, mortgage rates were at a whopping 7.2%, their highest in 21 years.

The Takeaway

In the face of a weakening economy and rising inflation, the Federal Reserve’s decision to hold interest rates could provide a much-needed respite for consumers and businesses. However, with the possibility of one more hike before the year ends, it remains to be seen how the economic landscape will evolve. The role of the Federal Reserve to balance financial vitality and consumer interests is crucial in these uncertain times.