By Peter Melahn, Staff Writer

The Federal Reserve opted to leave interest rates unchanged after meeting last Wednesday, signaling the central bank’s optimism that the U.S. economy is continuing to cool from historic levels of inflation following the COVID-19 pandemic. 

Federal Reserve chair Jerome Powell announced the decision last week reaffirming the central bank’s aim of achieving a “soft landing” for the U.S. economy following a sustained presence of historically high interest rates from post-COVID-19 inflation. 

In their meeting, the Federal Reserve noted that recent economic activity was “expanding at a solid pace,” differing from the “moderate” description seen in previous meetings. It also stated that  job gains have “slowed in recent months but remain strong,” though positive changes in employment were described as “robust” before.

The causes of recent high inflation rates vary, but most notably include government stimuli to invigorate the economy and pandemic-related supply chain issues causing prices of many consumer goods to rise. Higher interest rates on loans for consumers are meant to slow down economic activity by making borrowing more expensive, thereby decreasing demand for consumer goods.      

The Federal Reserve’s goal for the Consumer Price Index measured inflation is to be at or below 2%. Inflation hit a post-pandemic high of 9.1% from June to July of 2022 and has continued to decline. The central bank seeks to return inflation and unemployment rates to their targets and to keep them there permanently. 

To hold inflation and unemployment at steady target rates, interest rates must be held at a neutral rate, which the Fed continues to work towards. It is believed this neutral rate will be higher than it has been historically.      

Inflation has taken a noticeable toll on many Americans, with many noticing increases in prices on goods they consume on a daily or weekly basis. The inflation rate for August, around which the Fed was basing its interest rate decision, was 3.7%. 

This means the prices of many consumer goods — in a broad set of categories including food, drugs and energy — were, on average, about 3.7% higher this August than they were in Aug. 2022. Though this is a lot closer to the Fed’s goal of 2%, an inflation rate of 3.7% is still noticeable to many Americans.

“I’m worried for the consumer,” University of Chicago economist and a former chair of the White House Council of Economic Advisers Tomas Philipson said. 

“People are hit on both fronts — lower real wages and higher rates,” he added.

A higher neutral rate may have implications for the future of the economy as well. A higher standard for interest rates would make borrowing more expensive in the long run. Not only would taking out a loan to buy a house or a car be more expensive for those seeking to make that kind of purchase, but business investment may also slow.

As business and personal investors make sense of the past few months of inflation data, long-term Treasury yields have surged while major stock indexes such as the S&P 500 and Nasdaq Composite have slid over the past several months. This indicates investors may be concerned that a higher neutral rate may hamper growth in the future.

“A soft landing is a primary objective… that’s what we’ve been trying to achieve all this time,” Powell said.