Bayes expert comments on Federal Reserve interest rate pause

With inflation showing signs of easing in the US, the Federal Reserve decided at its June meeting to hold interest rates steady for the first time since it started increasing them in March last year.

The call to pause the rise in interest rates, which currently lie in the 5-5.25% range, has been described as a “hawkish pause”, and Jay Powell, the Federal Reserve chair, has signalled that it may need to raise rates again later in the year in order to get to grips with stubbornly high inflation.

Speaking about the Federal Reserve’s decision,Dr Francesc Rodriguez Tous, Lecturer in Banking in the Faculty of Finance at Bayes Business School (formerly Cass), said:

“I think the decision to pause increases in interest rates makes sense for several reasons. One, inflation, while still elevated, is substantially lower and has been on a downward trend for some months now. Second, fast increases in interest rates can reveal fragilities in the banking sector as we saw with Silicon Valley Bank. Third, the Fed is now close to the interest rate forecasts, so it has room to pause and explore whether all the actions taken in the past months are finally getting through to the economy. As such, this is an expected decision that should not have strong effects on global markets.

“The US is in a slightly different place compared to other countries like the UK. Inflation in the UK is significantly higher than in the US, while the interest rate is slightly below that of the US. Recent figures show that the UK is still growing, albeit at a slow pace. And the UK does not seem to have a ‘Silicon Valley Bank’-type of institution. Therefore, one would expect the UK to continue tightening interest rates, unless the release of inflation data this week shows a strong reduction. Inflation has been surprisingly persistent in the last few months, but the economy has also been surprisingly resilient to the fast hikes in interest rates—although monetary policy is transmitted with some delay and that could mean that we’ll see a worse performance in the second half of the year.”