US holds interest rates steady but signals lower borrowing costs next year

The Federal Reserve held interest rates unchanged last night but signalled that the record tightening it carried out to combat high inflation was over.

Consumers may enjoy lower borrowing costs after projections released by the US central bank made clear that it expects three rate cuts next year.

The Fed kept its historical high lending rate set at a previous meeting in July to a range between 5.25-5.5 per cent. The rate, which determines the cost to consumers and businesses of borrowing, will now remain unchanged until its next meeting in January.

The bank said US inflation had eased over the past year but “remains elevated”, adding that growth in the US economy had slowed. The decision was agreed by 17 of 19 federal bank officials, most of whom forecast that the central bank would make cuts of 75 basis points next year.

Experts said while the Fed has been reluctant to declare victory over inflation, which hit a 40-year high last year, its latest inflation outlook had a more positive note.

In its report the bank said inflation has been moving down faster than officials anticipated this year and core inflation, which excludes volatile food and energy prices, is expected to be at 2.4 per cent at the end of next year, down from 2.6 per cent in September.

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Despite this, Jerome Powell, Federal Reserve chair, said later that the rate setters did not want to take the possibility of further rate rises off the table, stressing they are prepared to raise rates if inflation began to take a hold again.

He said it remains “far too early to declare victory over inflation” and said the US economy could still behave in unusual ways so declined to rule out the possibility of a recession.

“No one is declaring victory. That would be premature,” he said but acknowledged officials were looking ahead to when they might lower rates as inflation slows. “That begins to come into view, and clearly it’s a topic of discussion,” he added.

The Fed, together with other forecasters, was seeing the slowdown of the economy without massive job losses seen previously when inflation had been tackled.

The Fed’s decision adds pressure on the Bank of England to pursue a similar course when it meets tomorrow. However, the UK economy is having a much tougher time than its American counterpart with the latest early estimate showing a 0.3 per cent contraction according to initial estimates from the Office for National Statistics. Data has also shown that UK wage growth remains strong.

By contrast, the US economic outlook has brightened in recent months because inflation and wage growth are slowing.