The US Federal Reserve (Fed) left interest rates unchanged after its meeting on Wednesday. The move was widely expected after the central bank had warned that it “does not expect” rate cuts to be appropriate until it has greater confidence that inflation is sustainable. Towards 2%. ”
Central bank officials have signaled they still expect three rate cuts this year, with investors expecting the first 25-basis point cut to take place in June.
Two weeks ago, Federal Reserve Chairman Jerome Powell said it was “not long” before the central bank gained the necessary confidence that inflation was sustainably moving toward its 2% target level, and the index He suggested that interest rates could begin to be lowered.
That was an attractive proposition, since lowering the Fed’s key interest rate has typically boosted the economy by reducing the cost of lending, from mortgages to business loans.
It could also benefit the re-election of President Joe Biden, who faces widespread public discontent over price levels across the economy.
But since then, the latest round of inflation measures has proven to be tougher than expected. Consumer prices rose far above levels consistent with the Fed’s target from January to February, according to a government report.
A second report also showed that wholesale inflation was surprisingly high. This could be a sign of inflationary pressures in the pipeline, with consumer price increases likely to remain high for months to come.
The key question for Mr. Powell and the other 18 officials on the Fed’s rate-setting committee is how or whether these numbers will change the rate-cutting schedule.
Powell is sure to be pressed on this topic at Wednesday’s press conference after the Fed concludes its most recent two-day meeting.
Central bank policymakers are also expected to release their latest quarterly forecasts on how they expect the economy and interest rates to change in the coming months and years.
The forecast, released by officials in December, called for three cuts in the policy rate this year, an upward revision from the previous forecast for two cuts.
Most economists think the latest quarterly forecasts will once again show policymakers expecting three rate cuts in 2024, although they could reduce the number to two.
Economists generally expect the first rate cut to occur in June.
On Wednesday, the Fed looks certain to keep short-term interest rates, currently near a 23-year high of 5.4%, unchanged for the fifth consecutive time.
And it may not yet be entirely clear to Fed officials whether they have been able to keep interest rates high long enough to fully rein in inflation.
Consumer inflation, measured year-over-year, has fallen to 3.2% from a peak of 9.1% in June 2022. However, it still remains at a level above 3%.
Also, the cost of services such as rent, hotels and hospitals remained high in the first two months of 2024, suggesting that high borrowing rates are not sufficiently containing inflation in the economy’s vast service sector. ing.
Fed interest rate hikes typically make it more expensive to borrow money for homes, cars, appliances and other big-ticket items, but they typically have a much smaller impact on spending on services that don’t involve loans.
With the economy still healthy, there is no compelling reason for the Fed to cut rates until it feels inflation is sustainably under control.
At the same time, central banks face conflicting concerns. If we wait too long to cut interest rates, borrowing costs will remain high for an extended period of time, seriously weakening the economy and potentially pushing it into recession.
Powell warned of these consequences when testifying before the Senate Banking Committee this month. He said the Fed is increasingly confident that inflation continues to slow, although not linearly.
“When we have that confidence, and it’s not far from then, it will be appropriate to start ‘cutting rates’ to keep the economy out of recession,” he said.
Despite widespread evidence of a strong economy, there are also signs that the economy may weaken in the coming months.
For example, Americans spent less at retail stores in January and February.
The unemployment rate stood at 3.9%, still a healthy level but up from 3.4% last year, the lowest level in half a century.
And much of the hiring in recent months has been in government, health care and private education, with little growth in many other industries.
Like the Fed, other major central banks are also keeping interest rates high to ensure they are able to cope with rising consumer prices.
In Europe, pressure is growing to lower borrowing costs as inflation falls and economic growth stalls.
The Bank of England is not expected to open the door to an imminent rate cut at Thursday’s board meeting, although the European Central Bank chief suggested this month that a potential rate cut would be in June.
with post wire
