US Fed Reserve holds interest rate, sends hope

The United States Federal Reserve, its central bank, did not increase the interest rate as it had done since 2022, in its December meeting, and the status quo — the existing interest rate of 5.25 per cent to 5.5 per cent — sent ripples of hope among economic analysts and businesses.

It is now seen that the US economy did not go into a recession which was expected with the tightening of the interest rate, and it is being predicted that the central bank has managed to get the US economy to make a soft landing.

Fed Reserve chairman Jerome Powell said on Wednesday as inflation came down to 3.1 per cent from a high of 9.1 per cent in 2022 that Fed is hoping for a “continuation of what we have seen, which is the labour market coming into better balance without significant increase in unemployment, inflation coming down without a significant increase in unemployment, and growth moderating without a significant increase in unemployment.”  

The decision to hold the interest rates has also given rise to the hope that perhaps, all things remaining equal, there could be a dip in interest rates by the end of 2024. The unusually happy expectation is based on the grim stance that Powell had adopted saying that he would raise the interest rates until inflation comes down. The fear was that in his focused fight with inflation, the Fed would trigger a recession through higher interest rate. There is then a justifiable sigh of relief that there is no further increase in the interest rate. The resilience of the US economy has come as a surprise to the economic analysts because they were certain that the country was staring recession in the face.

The high inflation rate of 2022 was attributed to the government’s cash transfers during the Covid-19 lockdown of 2020. In 2021, as the country was recovering from the pandemic, problems surfaced, first in the form of shortage of labour. Then came the high rate of inflation.

But the Biden Administration and the Congress did what they did in the post-pandemic period of 2021 because through 2020 the Trump Administration refused to see Covid-19 as the pandemic it was, and it refused to respond to the nationwide medical emergency.

In 2022, Powell took a firm stand that runaway inflation cannot be allowed, and it has to be tamed even at the risk of recession. That the economy showed resilience has come as a surprising and happy relief for all. The Fed’s inflation target is to keep it below 2 per cent, and observers are of the view that it is possible to meet the inflation target without raising the interest further.

The reason for the American economy’s domestic turnaround seems to be the revival of hope and optimism among the people, who continued to consume, to shop, and to return to the jobs which they were not doing earlier. It is the buoyant spirit in a large section of the people which encouraged businesses to open up.

While economic trends explain a lot of outcomes, there is the intangible factor of how people at large respond, and it is this intangible factor that seems to matter most when the chips are down as it were. Americans in general are optimistic people and they do not hold back on their instinct of work-and-enjoy ethic for long.

This outlook is what drives the economy apart from its innovative genius on the technology frontier. The world’s biggest economy is leading from the front in the Artificial Intelligence (AI) sector, which is likely to bring about sharp changes in the economy.